Thursday, March 6, 2008

State of the Market - 3/6/08

More bad news from the housing market and some mixed reports from retailers caused the markets to open marginally weaker, and that weakness grew throughout the morning into the lunch hour. Unlike past days, however, the markets never bounced, and the selling continued into the close, gaining strength in the last 15 or so minutes that caused all indexes to close at the lows of the day. With the Nasdaq and S&P 500 both losing more than 2%, today’s action was very bearish. These two indexes closed right near the intraday lows of Wednesday, and they are not far away from some very big psychological numbers such as 12,000 for the Dow and 1,300 for the S&P. There is no way to take anything from today’s action other than things are not good and it looks like the second wave of this bear market may be starting. Tomorrow should be very interesting with the jobs report coming in the morning. If the numbers confirm the recessionary fears of most, then things could get very ugly very fast.

I wrote earlier in the week that I plan on focusing on retailers when the opportunity arises to short, and that came to fruition today. I noticed a lot of retailers breaking down today and many of them look shortable right here, although they are extended to the downside so entry is a little riskier. The bounce they put in over the last month appears to be ending in most cases, and the market follows through to the downside here, it may not matter that they had big down moves today in terms of entry. With oil continuing higher every day and money being worth less and less each day due to inflation, it makes sense that the consumer is not spending a lot of money. Walmart, Target, and Costco, not what I would call high-end stores, all reported sales above what was expected, and that tells you something. Walmart said two of their biggest gains came in groceries and health items. It is probably a safe assumption that this non-recession we are in is causing people to spend money on only what is really important(food and medicine) and not on other, less important items like the newest clothes or newest technological devices. The apparel stores were the ones reporting disappointing numbers. The only position I was in before today was MW, and I regret not loading up on a few more, but things are always easier in hindsight. As we approach the next earnings season, I think there is a good possibility that we see some major shortfalls in earnings from these retailers and that is why I am looking to short them. People aren’t spending much money right now. Most of these have fallen a good amount already, so I don’t know if they are longer-term shorts, but I think many have another 20% or to possibly fall, based on what their charts look like. As the government handou.., I mean, stimulus package starts to get in the hands of consumers, things may begin to pick up in this sector, but that likely won’t be until the start of summer. That’s why shorting this sector makes sense to me right now. Of course, this market has done little in terms of sensible things, so who really knows?


I added to two of my shorts at the end of today and established two more positions. I have been wrong before, and I probably haven’t learned my lesson, but I think some of these metals and oils are due for a big pullback if the market goes lower here and shortable. There is no doubt that this is where the hot money is, and if they pull out due to the overall market, these stocks could fall quickly. There are just too many divergences I see in some of my Telechart indicators for them at some point to not have a big pullback. I have one of these charts below that I am watching.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Bottom line is that things do not look good for bears right now, and if we get follow-through tomorrow to the downside, things will get ugly in a hurry. This market has had a way of frustrating bears, so anything is still possible. A lot will depend on this jobs number. A surprise gain will likely cause a short-covering rally, but that has to actually happen first, and if we are indeed in a recession, this is unlikely. Regardless of what the number is, tomorrow should definitely be interesting. I will try to put up some more charts tonight. Good luck.

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