Monday, March 10, 2008

State of the Market - 3/10/08

Another poor day in the market, although the indexes pretty much opened even and stayed relatively calm for the first hour or so before moving lower throughout the morning. Lunchtime brought a little bounce, but that bounce was met with more selling into the afternoon. Several late attempts at bounces did not stick, and all indexes closed near their lows for the day. The Nasdaq led the way lower with almost a 2% loss, while the S&P 500 lost a little over 1.5%. Financials led the way lower as rumors of liquidity issues at Bear Stearns, an FBI investigation of Countrywide, and lower ratings given to Washington Mutual caused investors to sell this sector off even more. Stocks from the commodity sector continued to sell off, as the SMN inverse fund put in another large percentage gain today. When you see leading stocks such as MTL and CF sell off on very heavy volume, it is a sign that not all is right even in this strong sector. For the past few weeks, these are the stocks that have been holding this market up, but if the recent weakness continues, then things could get uglier overall.

Technically, the Nasdaq closed below its January intraday lows and with it finishing at its lows, perhaps there is more downside to go this week. The next area of support is a long way away, down near the 2025 area. The S&P 500 is still holding its intraday lows from January so a bounce is possible here, but it is also possible, as weak as the Nasdaq is right now, that the selling accelerates here if we break these lows.

S&P 500
Charts from Telechart 2007, Courtesy of Worden Brothers, Inc.

I still see much discussion of how oversold the market is here and how this could be a bottom. I was and still am tempted to take some or all of my profits on the shorts I put on last week right now, but I am not going to right now, probably just tighten stops a bit. Until we see extremes, I still think there is more downside here. Sentiment isn’t there yet. The VIX is nowhere near extremes yet - not even over 30 yet. Market monitor scans still have room to go to the downside to indicate extreme levels of oversold. The T2108 indicator did get below 20 today, which in the past has indicated possible bounces, so that is something to watch. I had a discussion with a fellow blogger yesterday about this very issue of a bottom here. He is a little more bullish right now and I am a little more bearish. I have to admit that there are some good bullish arguments out there – we are near previous lows that look like they may act as support(well, not on the Nasdaq), the Fed rate cut is in the cards next week, and there is a ton of bad news out there right now. They do say things always look worse at the bottom. I think it is good to read opinions that are different from yours to make sure you are not too comfortable in your own opinion.

However, I think or at least hope I’ve learned this year that I need to be a little more reactionary as a trader and a little less anticipatory. There will be time to turn and go long here if we do indeed have a bottom. Anticipating a bottom and playing it perfectly would be great if I was indeed right, but how do I know that I will be right? If I am wrong, I will be giving up my positions and possibly more profits on my shorts, with nothing to show for it. I keep thinking back to the part of “Reminiscences of a Stock Operator” when Mr. Partridge keeps saying to the younger traders that urged him to get out of his positions before a pullback, “well, it is a bull market, you know.” Well, right now, we are in a bear market, and although we are oversold and we may indeed bounce here, I am trying hard to stick with the prevailing trend and ride it lower. It is hard to see some paper profits disappear when the market temporarily goes against you, but sticking to the trend will make you more money in the end if you can do it. If we get a complete washout day like we did in January, I will cover like I did back then. That situation was just a little too perfect so I doubt we get another setup like that. But unless we get another washout, any bounce will likely be a short-selling opportunity.

In terms of starting positions here, I would advise against it. If you think we are due for a nice bounce, I would just wait for things to get a little more extreme. I wouldn’t mind having a bounce here – I just think the bounce will be that much stronger and easier to play the lower we go. If we do bounce right here, it might last for a few days, but I think that would be it. Shorting right now is too dangerous, so I would also advise against it. Hopefully, you started some positions last week and you have some small profits in those. I would suggest riding those lower until the market clearly shows a change in trend. I like to use the 9 day moving average as a short-term indicator and have noticed on some of the nicest shorts so far this year, like GRMN, AAPL, BIDU, STP, and GOOG, rarely popped above this level and certainly didn’t get above the 20 day moving average. (See the charts below) These layers tend to act as short-term resistance just like they act as short-term support when going long in strong stocks. So I will keep an eye on these levels and use them appropriately as approximate stop-loss points on my shorts. If you are a risk-taker, you could use these areas to start or add to existing short positions.


STPCharts from Telechart 2007, Courtesy of Worden Brothers, Inc.

Overall, we are in an interesting spot here. There is no doubt that we are getting to be or are already oversold, but I still just don't sense the fear needed to put in a good bottom. Although we have been down a large amount in March, we have had only 1 loss of over 2% this month. The selling has seemed to be more systematic. Oh, and by the way, Texas Instruments lowered its outlook after the close today, so that probably won't help things tomorrow. On the other hand, with the expected Fed cut staring traders in the face, perhaps we don't go much lower. It's hard to predict what will happen. I really do think any bounce we get here will be a disappointing one unless the selling really accelerates for a few days and the fear really builds. If we get another washout, with the VIX rising significantly, then we might be setting up a meaningful bottom. Until then, I would avoid bottom-fishing here and don't try and short overextended stocks. Might be best to just sit and wait for the market to tell us what it wants to do next. Good luck.


bmbull said...


Knowing you're an IBD follower, I thought I'd mention that Gary Kaltbaum said on his radio show today that William O'Neil will be a guest on tomorrow.

Mac said...

Thanks - I saw that on your blog. Although we are likely nowhere near a true bottom here, it is always good to listen or read wisdom from O'Neil if you can.

bmbull said...

He was just on that same show about a month ago, and I listened to that one. He takes lots of listener calls, so that's rather interesting to hear his answers. Of course, the host helps him push IBD quite a bit, but that's what he's there for.

One of the interesting nuggets from that last show was his comment on that rather 'odd' follow-through day they called a while back, using their own proprietary indices. It sounded like they had second thoughts about doing that, and that is was unlikely they'd be doing that again.