Big-Cap Tech Selloff Hits Nasdaq With Another Large Distribution Day; Pharmaceuticals And Drugs Hold-Up DJIA.

January 19, 2007

Stocks on the Nasdaq simply got nailed today, as a weak outlook by AAPL followed by two downgrades hit the stock with a 6% loss. This along with a weak profit outlook from LRCX with a downgrade simply was too much for the small-cap and tech indexes to handle.

At the close, the Nasdaq fell 1.5%, the SP 600 lost 1.1% and closed below its 50 dma, the SP 500 fell .3%, and the DJIA held like the champ it has been with a minimal .07% loss.

The most disturbing action behind the selloff came from leading stocks. Many leading stocks took big whacks and the IBD 100 fell 2.3%, when all was said and done. Leading the market to the downside by quite a bit.

Volume was much higher on the Nasdaq, giving that index a clear distribution day. That makes it three distribution days in four weeks now for the Nasdaq. There still needs to be one more before there is really something to worry about.

Volume on the NYSE was higher but not at the same fury that the Nasdaq was. However, this too, is a distribution day for that index. That makes it two for the NYSE in the past four weeks.

Breadth was negative on the NYSE, with decliners beating advancers by a 5-to-3 margin. On the Nasdaq, decliners beat advancers by an 11-to-4 margin.

Today was more ugly underneath than what even the numbers tell. Pharma and drugs made strong moves today and I see plenty of nice charts now in this sector. This sector only gets plays in weak market environments. So my first thought is that maybe we are beginning a rough patch in the market.

Then I checked out the SOX index and saw the massive breakdown as the index had what I call a mini-crash of 4%. The last day down this big was in July last year. However, that big down day came after a very long dowtrend was in effect for over two months. This time it comes right as it was about to create and breakout of a nice basing pattern.

This is about as wrong of action you want in an index as you will get. Stocks like SMOD, NETL, NVDA, AEIS, CYMI, XLNX, VSEA, NVEC, along with LRCX show clear breakdowns from strong patterns. This is not good, looking forward, for this sector.

Then looking at a lot of my recent buys it becomes clear that many many many stocks are flashing clear breakout/breakdown patterns. This is when a stock breaks out of a beautiful base only to immediately retreat in higher volume. This has not been seen so far in this uptrend and now it is showing up.

Take this, along with the negative divergence I have posted in the Gold Forums of the advance/decline line and the new highs in the market being much much lower with the market hitting new highs, and you have some nasty warning signals lining up.

Don’t forget that the Investors Intelligence and the AAII both show bulls around 50% and bears around 20%. That is some extreme bullishness and tame bearishness.

Along with all this info, take into account I will be selling outright 20 stocks in the morning along with another 20 partial sells and you have a market clearly signaling that we should raise our caution, tighten our stops, and worry more about protecting gains than making more gains.

However, saying all of this, it is still not time to sell everything and short this market. The vast majority (80% or so) of stocks are still in clear intermediate term uptrends. Fighting the general trend in a stock is just foolish and an amateur’s game.

The SP 600 is still the only index under the 50 dma. The Nasdaq is still above it. You can’t short the market and expect consistent solid gains with the general market in an uptrend and over the 50 dma.

History shows that the indexes will have already flashed four or more distro days and will be downtrending under the 50 dma before some of the fastest most dramatic declines in stocks start. Don’t try to be smarter than the market. The market is always right.

We need to wait until the trend turns lower to start shorting. Imagine selling all your longs now in a panic just to see the market bottom here and rally another 15-20%. You would feel stupid, wouldn’t you? I know I would.

Therefore, if your stocks are in uptrends and holding key levels or pulling back on lower volume you should hold those strong acting stocks. Better yet if your holdings were up today.

Make sure you take some profits but know that you should not panic and sell all. If your stocks are weak, show losses, are closing below key support on strong volume, consider selling it. You must keep losses under 8-10% at all times, if your stock does not show you a gain immediately. It is your ONLY insurance plan.

IBM gave the market yet another weak report, after the bell. This may continue the selling tomorrow. What is now for certain is that if this does weigh on the market, it will weigh on the DJIA also. So we may need to expect the DJIA to now selloff along with the Nasdaq.

We also have earnings from big boys like GE and C tomorrow. So I am sure the excitement will continue.

Aloha and I will see you in the Chat Room.

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