A Nasty Bearish Reversal Off A Bullish Reversal Sends Stocks Lower On Heavier Volume

June 13, 2007

The 10-year bond sent stocks lower today as yields hit 5.30% which was much higher than yesterdays rise to 5.15% and stoked inflation fears. This put yields at their highest level in five years and sent stocks on a wild ride that I have not seen in months. This move on the bond yields sent stocks on a tizzy as a weak open turned into a very bullish reversal but the weak internals hinted at what was to come as the market sold off the rest of the day sending stocks near their lows of the session. If you look at a chart of the TLT you will understand why stocks are coming under such pressure. That is one ugly chart.

At the close, the SP 600 and NYSE led to the downside losing 1.2%, the SP 400 and SP 500 lost 1.1%, the DJIA lost 1%, and the Nasdaq closed .9% lower. The New America Index lost 1.1%, which was better than the 1.2% losses on the NYSE and SP 600, signaling that leading stocks were doing better than the worst indexes.

Volume was much higher on the NYSE and the Nasdaq, giving both indexes another clear distribution day. This brought the count up to five on the SP 500 and DJIA, six on the NYSE, and a massive eight on the Nasdaq, during the past four weeks. To go along with the distribution, the NYSE also closed below the 50-dma, becoming the first index to do that in months. The trend is starting to change.

Decliners led advancers by a 7-to-1 margin on the NYSE and by 11-to-4 on the Nasdaq. There were only 82 new 52-week highs compared with 192 new 52-week lows–this is a high number of new lows considering the major indexes are only 3% off their all-time highs. So overall the internals are confirming the weakness in the market. And as readers of this blog have known the internals have been hinting a change for quite a while now. It appears the market is finally ready to catch up.

It is obvious the market is undergoing a change in character on the short-term but everyone must remember that in the long-term and intermediate term the market is still in an uptrend. When you look at the indexes you can also see that all of them, except the NYSE, is above the 50 dma and are all only 3% off all-time or recent highs. That along with many of my great performing longs holding key support clearly tells me that panic selling and shorting is not the right play here. I have only been selling down a handful of top stocks and most of the complete sells are coming in either recent buys or extremely speculative longs.

So I must reiterate, do NOT panic sell out of fear that the market is going to rollover. Take your cue from your stocks. If your stocks are holding key support and/or their key moving averages and you have gains, hold them. If you just went long a stock and are now in the red, get rid of it. I know some people that are discouraged by the market being so rough right now. But you have to remember this rally is late and has been looking very funny and iffy for weeks. To be buying stock in bulk here is simply the wrong play. Smart defense is warranted here. Not panic selling.

This also goes to prove to those who still do not understand that the best time to go long stocks is in the days and weeks shortly following the follow-through day on the major market indexes. When you are four plus years into one of the strongest bull markets ever and you start seeing such clear divergences in the internals and yet you still go all out on full margin, you only have yourself to blame for the churning in your account. We are late; the “perfect moment” has come and is long gone. You are years late. We need a real market pullback to make the KILLING that the market can offer you. Until we get a real pullback that raises the volatility in the market, you are not going to be hitting 100% to 300% winners, left and right, in a matter of months. I know that I am not going to make a fortune again, until the market has a significant pullback. Then I can short the old leaders and keep my cash heavy waiting for the next “perfect moment.” And we will have another one. You can bet the farm on that.

The put/call ratio has fallen dramatically to .65, signaling that the crowd is placing bullish bets on this pullback. That probably doesn’t bode well for higher prices in the short-term. So if you go long a stock and it goes nowhere, like LWAY did today for me, make sure you sell it and get rid of it. It should move higher immediately. If your stock does not move higher right away, get rid of it. Or like I said earlier, just don’t trade, if you are a new investor. This isn’t the time to make a killing in the market. This is the time to hold onto gains and wait the market out and let it make up its mind before making any new investments. If we go sideways for a while and breakout to the upside, you will be happy that you held your longs. If we go sideways and breakout to the downside, I am sure you will not sacrifice too many gains compared to the profits you risk to lose by selling now.

Be careful out there! We have the PPI and CPI on Thursday and Friday. So expect more of this crazy wild volatile summer trading. Aloha and I will see you in the chat room!!

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