Wednesday, March 18, 2009

State of the Market - 3/18/09

What a day. Fed days are always crazy, and today didn't disappoint in that regard, as stocks bounced all the way off their morning lows and spiked hard when the announcement was made that the Fed is going to add $1 trillion more to their balance sheet. As always, the best way to get out of debt is to add more debt, right? The market took this news well at first, breaking to new highs for the day and extending their recent run. They pulled quickly back when the S&P hit 802, but then bounced back up into the close. The XLF broke through some key resistance around $8.80 today as well. Volume was heavier today.

The markets are now even more stretched to the upside and my outlook remains the same - buying here is playing with fire. What I think we are seeing is some panic buying that could go on longer than I and most people think. That doesn't mean I want to play it, because when it stops, things will likely be very ugly. We have not had one rally initiated on government intervention that has worked yet, so I have my doubts that this will be any different. Volume continues to be unhealthy as I have stated here many times. This is probably a great shorting opportunity, but determining exactly when this thing will turn down or at least pullback will be difficult to say the least.

For that reason, I will likely continue to sit things out here. I was stopped out of my MASI short at $27.25 for a small loss of under 1% and am totally in cash. I would love to get short but I know this panic move can move higher from here and I don't want to lose anymore on that side of the market. That being said, the indicators I watch are just as stretched as they were back in January, which marked our last major top. We'll see if this turns out to be any different. Maybe the market can just move higher forever. Maybe this particular market can overcome these extremely overbought levels. I am not putting my money on that outcome, however, because I don't think it is a good bet.

Remember we have options expiration Friday, so things will likely continue to be difficult for the next few days. If I have time, I will show you some of the things I see that show how overbought we are. For instance, the McClellan is back over 300 after today. That's just one example. Good luck.

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