Tuesday, May 27, 2008

State of the Market - 5/27/08

The stock market opened flat this morning, but due to lower oil and better-than-expected home sales number, rose to modest gains early in the session. These gains couldn’t last very long, and a little after 10:00, the indices back down to their lows for the day. Around lunchtime, the market found a bottom, and stocks rose throughout the rest of the afternoon, breaking to intraday highs around 2:30. The indices couldn’t do a lot after breaking to those highs, and finished with modest gains, although the Nasdaq outperformed nicely today with a 1.5% gain. Volume looks to be low, even compared with the low totals of Friday’s session before the three day weekend, which takes the shine off these gains considerably.

Technically, the Nasdaq bounced right off the bottom of its ascending channel and managed to finish above its short-term 9 and 20 day moving averages, which is impressive. The S&P 500 also bounced off support levels (its 50 day moving average) and both indexes could still move a bit higher from here. However, with the pathetic volume totals, I would not put too much emphasis on the gains. It is still quite obvious that the institutions are not buying stocks right now. The Dow remains the weakest of all indexes and needs to be kept away from completely. I could see the S&P 500 running up to the 1400 area where its short-term moving averages are and the Nasdaq up to around 2510, where its 200 day moving average are, but I would be surprised if they went any higher unless a massive amount of volume starts coming into the market. I would be looking to enter shorts around this area if I see any setting up.

Although I still am expecting lower prices on all the indices in the near-future, one situation I have been thinking about has me evaluating one other possibility. It seems pretty simple that oil has really hit the psychology of this market right now. The market broke down last week in large part due to the record high oil prices that were being set on a daily basis. It looks like oil is certainly pulling back here, perhaps for just a short time period, but perhaps it is starting a much longer, severe correction that is overdue based on individual stock charts. If oil continues to head lower over the summer, I think it will be hard for the market to head a whole lot lower than where we are at right now, particularly the Nasdaq. I still fear that if oil continues to correct, what we will face is a choppy market where some sectors and stocks work OK, and some don’t work at all. I am not jumping on this scenario and buying stocks, but I will watch it as a possibility. If I see nice, fundamentally-sound charts setup, then I would consider entering them if oil heads lower. That’s the problem – I don’t see a whole lot of nice charts. I still feel this is a market where doing nothing is probably a smart play. You can pick your spots, but you have to be very careful when you do.

I did nothing today in terms of my positions. Commodity stocks got hit today and since I am short CNQ and CF, I was happy about that. I am picking my spots and the commodity sector is looking weak right now. The ags finished off their lows in some cases, but I still get a feeling that these stocks are just biding time before heading much lower. Oil is indeed pulling back here as well, but it is too early to tell for sure that it will be just a short-term pullback or something that will last much longer. I will continue to move my stops up on DUG and go from there. Since they have been down several days in a row, I wouldn’t be surprised for some of these oil stocks to bounce in the next day or so. I will look at the volume on the bounce to see if this pullback is over, or just beginning.

All in all, the weak volume today makes the action rather meaningless in my opinion. Right now, I will continue to look for weak-volume rallies in weak stocks as possible shorts, but I will be very careful in my selections. At the same time, I am not discounting certain sectors of the market moving higher if oil continues to move lower. I just don’t know if I want to play those sectors. Protecting my gains and not making any big moves when there is no obvious edge out there is what I plan on doing. I hope that’s the best game plan – it appears to be. I’ll be back later with some charts. Best of luck.

1 comment:

1option said...

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