Thursday, March 20, 2008

State of the Market - 3/20/08

Well, the market were up 4% on Tuesday and down 2% yesterday, so what else would you expect but a big up day today, and that's what we got, as the indexes were all up over 2% across the board. Volume was also higher, which is pretty typical of an options expiration day. Similar to Wednesday, financial stocks were higher across the board, thanks to upgrades to Fannie Mae and Freddie Mac, and an announcement that the Fed would accept less liquid assets as collateral for loans. Similar to yesterday, oil and commodities were weak on a stronger dollar, although stocks in these sectors closed well off their lows for the most part. So for all of the action this week, we have still not broken to new lows. We are still under our 50 day moving averages on all indexes. We have yet to have a follow-through day on any indexes. As I have been saying for about the last week, this market continues to be difficult for both bulls and bears to trade due to the volatility from day to day, and cash remains a good option until things become more clear.

As we enter a new week next week, I still have very little clue as to where we will go. There are some good arguments on both the bullish and bearish sides of the market.

From the bullish perspective, here are some things I see:
  • The spread on the Investors Intelligence Survey this week got even wider, with only 30.9% bulls and 44.7% bears.
  • Most news broadcasts I've watched this week have led with stories about the economy, stock market, and how bad things are. They do say things are worst at the bottom.
  • I do think it is bullish that with all of the bad news out there, including the collapse of a huge investment firm (BSC) we still did not break to new lows for the year.
  • Two big up days this week is nice to see, although big one or two day rallies are common during bear markets.
  • Commodities look like they are pulling back here, and if they do, that will help a lot of the sectors that have been beaten down and are struggling, like transports and retailers.
  • If the commodity sectors continue to break down, money will likely come out of the oil, metal, and agriculture stocks, and this money has to find a home somewhere.
From the bearish perspective, here are some thing I still see:
  • I continue to see very few "new" stocks popping up in my scans with great charts, strong volume patterns, and great fundamentals.
  • Much of the gains made this week were driven by beaten-down sectors like the financials and real estate sectors making nice gains, not new stocks breaking out.
  • Although the VIX did spike to begin the week, it did not get to extreme levels and could not get above the high set at the January bottom.
  • We still have much overhead resistance to deal with.
  • Bear market rallies are notoriously quick, powerful, and often are very short-lived. Most of the biggest one-day percentage gains were found in past bear markets. They tease people just enough to pull them in before ripping their hearts out. There is a possibility that Tuesday was one of these day.
  • I found it interesting that after just one nice week on the indexes, I see this headline on the CNBC website - "Is the Finanical Crisis Over? Some Believe It May Be". So that's it - people are now thinking we're through this mess??
Basically, this is my mindset right now. I am open to either side of the market right now, but still lean more bearish. I believe the arguments above tilt more to the bearish side in my opinion. This rally has already put some stocks into nice shorting position and if it continues, more will likely enter nice shorting zones. I won't be loading up on shorts yet, and with both the month and quarter ending next week, I wouldn't be surprised to see some window-dressing that keeps this rally going, perhaps even past some of the resistance I mentioned on charts this week. That doesn't mean I plan on loading up on longs. My attitude right now is that unless we get a very strong follow-through day per IBD rules sometime in the next three days on the Nasdaq and S&P 500, I have to refrain from jumping into any longs. Technically some rallies follow-through on the third day, and today is the third day of the new rally attempt for the S&P 500 and Nasdaq, but I don't think IBD will count today for those indexes because yesterday was such a bad day. Third-day follow-through days only happen when there are three very powerful days in a row. IBD will likely put the "market in confirmed rally" tag on this weekend since today will probably count for the Dow as a follow-through. As I mentioned Tuesday, I don't always agree with this and would like to see the Nasdaq and S&P get that follow-through day on their own. If they do, and more charts pop up, then I will change my tune and become more bullish. William O'Neil states that a powerful follow-through day should be accompanied by new, fresh stocks breaking out of nice bases, and based on my early scans, I did not see that today. Sometimes rallies develop slowly, and maybe this one will as well. I am just going to make Mr. Market prove itself to me more before jumping in.

Right now, I am going to go through my scans, and then try not to think about the stock market too much this Easter weekend. I would like to watch some basketball(go Pitt!), spend some time with my family, and think about the true meaning of the Easter holiday and the gift we've all been given through Jesus Christ. God bless this weekend!

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