Today Was The Exact Opposite Of Yesterday, As The Market Stages One Ugly Reversal; Mixed Volume Leaves Things A Bit Ambiguous.
January 26, 2007
After such a nice day yesterday, where the Nasdaq bounces right off its 50 dma, the last thing you want to see is an immediate reversal; well that is what we got. Stocks almost gave back all of yesterdays gains in the Nasdaq and gave all of the gains back in the SP 500 and DJIA on a report on existing-home sales. This along with a weak response to the 5-year note auction helped slam stocks.
When all the selling was done, the Nasdaq led the way below with a 1.3% decline falling right back below the 50 dma, the SP 500 and SP 600 followed with 1.1% declines, and the DJIA fell 119 points or .95%. The worst of the selling hit leading stocks, with the IBD 100 falling 1.7%.
Volume was slightly lower on the Nasdaq, giving a bit of comfort to the nasty decline. On the NYSE volume was much higher, giving this index another clear distribution day.
Breadth was downright horrible. Decliners beat advancers by a 2.5-to-1 margin on the Nasdaq and by a 3-to-1 margin on the NYSE.
What else is there to say about today except that today was ugly. Reversing the gains that we made yesterday, with the Nasdaq and SP 600 falling back below the 50 dma is not good. However, when I went through all my stocks tonight I found very few to completely sell. The huge losses, you would have thought, would have forced me to sell a lot of stocks that completely failed moves. But that did not happen. Most of the stocks that had to be cut were also completely speculative as the true leaders are still holding their 50 dma’s.
So while I have all my stocks holding key support, I have to take into account that the market is weakening. That is why I have been taking profits on stocks that make big one day gains and taking partial losses on stocks that immediately do not follow through. But overall I have a lot of stocks that are still holding support so there is nothing for me to panic over.
Saying that, the Nasdaq has had 3 distribution days in the past four weeks and the NYSE has had three also during that time. A couple more of these and the indexes under the 50 dma, along with more stocks breaking down on high volume and I will have something to worry about. Being prepared is the best defense against a possible correction if one is coming.
If we have to take recent earnings reports of how things are in the economy, they are clearly telling us that it is slowing. This is turning out to be the first quarter where earnings did not rise double digits since 2002. The stock market is forward looking and if it starts rolling over, we can conclude that the inverted yield curve and slowing economic numbers are finally catching up to stocks.
Overall, it is really hard to form a concrete opinion on the market right now. i am neither bullish or bearish but I am keeping a bullish bias simply because I still have many stocks in clear uptrends. However, my new buys have either done really well or have reversed and let me out very quickly. Things have definitely gotten rocky out there but not scary yet.
I wouldn’t be surprised if selling hit the market tomorrow but at the same time it sure shouldn’t shock anyone if the Nasdaq and SP 600 retake the 50 dma. The only thing certain right now is uncertainty. I saw today that the AAII bulls is at 39% with bears coming in at 33%. That clearly tells me that there are another large group of traders just on the sidelines. That indicates to me that we could be in some choppy action for a little while. With bulls and bears in a tug-of-war some sideways movement would not be surprising either. Bottom line the market is not to be messed with here.
Keep your new buys small, cut your losses fast if your stock does not work out immediately, don’t let big winners turn into losers, take profits on the way up, and do not use margin at this stage in the game. It is not time to short either. Right now, playing the market is like playing with fire–it doesn’t end well usually.
The bears are starting to gain some control but the bulls still have control of the major trend. We shall see how we end the week tomorrow. Aloha and I will see you in the chat room. Be careful out there!!
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