Wednesday, July 2, 2008

State of the Market - 7/2/08

After putting in a bullish reversal yesterday, there was some optimism to start the day today on Wall Street, as futures were up pre-market and there was a slightly higher open. Unfortunately for the bulls, if there are any left out there, that open could not hold, and stocks began to once again sell off. The Nasdaq moved lower almost immediately, while the Dow and S&P spent most of the morning in a range before breaking down a little after 11:00. Stocks fell hard into and through the lunch hour, with only a few bounce attempts that didn't amount to much. They hit a low around 12:30 and gradually moved higher from there, getting back to the positive side briefly around 2:00. There they ran into a little overhead resistance on the Dow and S&P, and when oil spiked dramatically around 2:15, stocks dropped quickly. They continued to sell off systematically into the close, with stocks finishing at their lows for the day. Volume was strong.

Technically, that was one heck of a bounce, huh? The Nasdaq 100 reversed at a sensible location - the meeting of the 9 day MA and the former trendline it broke last week. The Nasdaq itself couldn't get up that high before reversing. The action was worse technically on the small and mid caps, which both could not stay above their lows from Tuesday. The Dow and S&P stayed above their recent lows, but not by much. Meanwhile, the put/call ratio barely got above 1.00 today, and the VIX did spike a bit, but is nowhere near the 30-40 area. One of these days, likely when sentiment gets really, really, really bad, one of these bounces is going to stick and we will rally hard with a lot of short covering. We still appear to not be there yet. Dip buyers continue to get crushed for the most part. I would have to assume that this bounce attempt is over, even though we continue to be very, very, very oversold and stretched to the downside here.

The big story of the day from my charts was the commodity sector. It got crushed - steel, coal, and most oils were all very poor today. The oil was surprising in that crude was actually up on the day - that is not good news for these stocks. This was the only group that was doing well throughout this most recent market downturn, and if they are done (and there are definitely some ugly charts here after today) then perhaps the market will give it up for good and we can get some capitulation. I don't know if that will happen, but I am considering it, now that it looks like the bear has started to get to every sector, not just the banks and real estate.

Early in the session, I did cover my CPLA short @ $60.25 for a very small loss (under 1%). After seeing the market reverse once again, I decided to put on two shorts - SOHU @ $72.81 and HK @ $51.01. I have been watching SOHU for a while and it did bounce this morning right up to its 20 day moving average. That would have been a much safer place to enter, but I thought it could get higher based on the market. When I saw it and the market roll over, I thought I better get in. I probably acted too hastily there. HK was based on the fact that I saw a ton of oils getting hit today (the entire commodity sector was in bad shape) and after putting two gaps in in a total of three days, I thought this was getting climactic and could reverse. It did, and I based my entry on the intraday chart. It did continue lower and looks quite bearish.

I added more shorts later in the session - VMW @ $55.50 as it ran up to some resistance on weak volume, and PXP @ $69.55 as it looks to break below support on heavy volume. I thought about taking more, but I didn't want to chase and I am still a bit worried about tomorrow. There is a LOT of news coming out (jobs report, EU rate decision) that will likely drive trading, and if any of it is bullish, then this market can run being as oversold as it is. At the same time, I want some short exposure because if the news tomorrow is bearish, well, then, watch out. Once again, I have to remind myself I would have been better off just holding tight on the shorts I had last week, but this market is a tough one - I am guessing quite a few people covered yesterday anticipating a bigger bounce (well, any sort of bounce) that we got today.

Tomorrow will be a very interesting day with all of the news. This market is obviously awful right now, and I really don't know which way we go tomorrow. I am guessing down unless we get some major surprises on the economic front. A lot of people are saying the rate hike from Europe is priced in, and it very well may be. Still, if they do it, the dollar still will likely sell off a bit, which will likely drive oil prices even higher. We know how the market feels about that. Maybe that is too obvious a scenario to happen - I don't know. After another failed bounce, I think we may be setting up a capitulation scenario very soon. We are certainly oversold enough for it to happen. The VIX started moving higher today. If we have a bad day tomorrow, certainly the weekend is not going to be a fun time for most traders. That's why I am going to press the shorts a bit here. I know it is a risk, and I will cover quickly if turns out to be bullish, but as of now, the bears definitely retain control of things.

All of this selling is good in one respect - each day is getting us closer to a tradeable rally on the long side, similar to what we had in March and April of this year. There were a lot of nice moves in stocks during that time. If we continue to sell off, we are eventually going to get to a point where things are so extreme that we do turn to the upside. Some of my Market Monitor numbers are getting close. Sentiment is getting closer. I will do my best to keep you informed of when we could turn. I don't think we're there yet, but we're close. Best of luck Thursday.

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