Tuesday, March 18, 2008

State of the Market - 3/18/08

Big day for the markets, as anticipation of a big Fed cut and better-than-expected earnings from brokers Lehman and Goldman Sachs led to a big open, and the markets didn’t hesitate to add to those gains as the morning went forward. The only problem in the early action is volume was lower, probably because of trader being hesitant before the Fed cut. When the news of the actual cut hit around 2:15, the market fluctuated as expected – that’s why it’s smart to stay out of the market on days like this. You can guess how the market will react, but that’s all it would be – guessing – which is basically the same as another “g” word, gambling. I made a mistake having positions during the last Fed day and tried to trade them, only to be chewed up and spit out. The true trend will hopefully show itself over the next few days, perhaps by Monday. It will be interesting to see how the market will handle the “disappointment” of only a 75 point basis cut, but based on today, they didn’t seem to mind too much. Markets finished very strong with huge gains of over four percent on all indexes except the Dow, and even the Dow was up 3.5%. A very impressive day for the bulls indeed. Now the question is what today’s action really means and where we go from here.

Technically, there is still a lot of resistance for this market to get through, so assuming we do rally for a few more days, which I think is very possible, it is time to look at possible areas for rallies to run out of steam. On both the Dow and S&P 500, the downtrend line is right near the 50 day moving average, so that would be the first logical area for this rally to run to. This would around 12,500 on the Dow, 1350 on the S&P 500, and 2325 on the Nasdaq. If we would get past this area on strong volume, that would certainly be bullish, but I question the endurance of this rally due to factors I discussed yesterday – no washout, no good charts, etc. I found it interesting as well that today’s huge move came on lower volume than yesterday. I also don’t like a market that is led by the Dow. I think this area would be a lower-risk point to put some shorts on. I also notice the VIX has a pretty strong trendline here, and if it gets back to the 23 area, it might be a good time to put shorts on. This trendline has worked well in terms of short entries so far. I will be focusing on the financials, retailers, and maybe the SKF inverse fund, but only if they continue to rally up to some resistance levels.

DOWS&P 500
Nasdaq
VIX
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Another thing that keeps me bearish right now is that the only index that was still in a valid rally attempt after yesterday is the Dow. This is what IBD said about the recent rally attempt:

“The Nasdaq, S&P 500 and NYSE composite undercut their previous lows, ending attempted rallies and resetting their rally day counts to zero.

Of the major indexes, only the Dow remains above its recent low. Tuesday will be Day 6 of its attempted rally.”

I thought that after today’s action, IBD would move to “market in confirmed rally” based on the Dow’s follow-through today. The only problem with that is you can’t have a follow-through day on lower volume. This is the only major problem I have with the IBD follow-through system – it tends to be somewhat vague at times like this. If three of the four major indexes already undercut their lows, doesn’t that tell us something about the overall state of the market? If we did get a follow-through day today on the Dow – let’s say volume was higher - their rules will state that is good enough to put the entire market in a confirmed uptrend – as long as one index follows-through, then they all do. I disagree somewhat and have always been confused by this – the Dow is only 30 stocks and the only real reason it was up yesterday and did not undercut its lows as well was JPM had a huge day off the Bear Stearns takeover and lifted that index. It almost seems at times they are bending the intention of the rules of a follow-through day to produce one. This happened back in December I believe when they used the IBD 85-85 index to get a follow-through day – it took them an extra day to acknowledge this, and they have never used this index before for a follow-through day. I would much rather wait for a follow-through on all indexes to get long here. I get the sense that if we were really ready to move much higher, and this was the real start of a major rally, then the rally on all indexes would still be alive and they all would have followed-through. So from my perspective, a follow-through day would do nothing but add to the confusion because not all of the indexes did so, just the Dow. The Dow is definitely the leading index right now, but is the Dow full of young, growing companies that are primed to make huge moves? Listen, I love IBD and realize they know what they’re doing, but I don’t always agree with their assessments on follow-through days. We shall see – I hope they are right and I am wrong, and that this rally turns into something special. I am going to try and keep my mind open. After I do my scans tonight, I think I will have a better idea of what today’s action really means – were there nice charts breaking out(I doubt it), or was today’s action mostly caused by beaten-down stocks rallying up, mainly from short covering(this is my hunch). But I find the lower volume today to be both surprising and ominous for bulls.

Bottom line is there is nothing wrong with waiting here and letting the market prove itself before jumping in on the long side. Today was certainly impressive, but I need to see nice charts breaking out before I change my bearish view – simple as that. If we get that over the next few days, then I have no problem turning sides. I would just rather wait for confirmation and be safer with my money right now than guess a bottom and then quickly be whipsawed and faked out, which would also cause me to miss some short entries. With options expiration, the next few days likely will remain volatile. It remains a difficult market, and one that is best played on the sidelines, at least for now and at least from my perspective. Good luck.

1 comment:

bmbull said...

Interesting comments on IBD and the Dow. I agree with you - I'd like to see the indices all in agreement, or at least the S&P and Nasdaq, which encompass more stocks than the Dow does. Yesterday's 'up' day on the Dow amidst the terrible internals was a good example of why the Dow isn't necessarily a real good measuring stick.

Though I am not a strict IBD follower by any stretch, I do take into account their view of the market when trying to decide which 'side' of the market to favor.