Subprime Worries Hit Stock Indexes As A Nasty Reversal Kills The Intraday Rally

June 26, 2007

An ugly reversal hit stock indexes today, after more worries over the BSC subprime hedge-fund investments came to light. The selling was broad and hit everything in its path. The SP 600 led the way lower by .7%, the Nasdaq dropped .5%, the SP 500 lost .3%, and the DJIA lost .1%. Theses losses though they don’t seem that bad overall are indeed bad when put in the context of earlier gains.

The IBD 100 even did something it hasn’t done in a while: lead the market lower. The IBD 100 lost .8% as leading stocks finally got hit with some selling. However, honestly, it wasn’t that bad as most are still holding their 50 day moving averages or key support. However, some indexes have now violated their 50 day moving averages and that officially puts them into mixed trends, with longer-term trends up and short-term trends now down in the SP 500, SP-600, and the NYSE.

The slightly comforting news behind the selling was that volume was lower than Friday’s levels. However, Friday was a Russell rebalancing day and it is kind of useless to compare volume to that day. Instead I look at Thursday’s levels and compare it to that. If we do that we see that volume was higher on the NYSE and the Nasdaq. Confirming the selling was the fact that volume picked up around 2pm EST when the indexes started their reversal. It stayed heavy into the decline.

But technically we can not call it a distribution day, even though in the back of our minds we know that today’s selling was a negative with volume increasing as prices reversed off a low volume rally. So, as it stands, the distribution count according to IBD is five on the SP 500, NYSE, and DJIA and four on the Nasdaq. So overall, nothing is serious yet.

However, we now have a market that is clearly getting choppy. Recent new buys are not working and the amount of good charts are coming to a crawl in my scans. Take that with the losses my portfolio has been having the past week and it is clear to me that, even though we probably are not topping, we definitely are not going to be having a smooth ride higher. Today’s rough move ahead of the FOMC meeting only underscores that the rest of the week will probably see more trading like this.

That means that it is time to take some profits on some big winners that may be making new highs on low volume and/or are putting in climax-like type runs. Right now, it is probably better to protect some of your current gains, raise some cash, not buy new stocks unless they are close to perfect, stay off margin, and if you do buy something to keep it small. It is just the right play, right now. With the market acting the way it is and with my scans drying up of pretty charts.

Seriously, there are not ANY charts that I can find with max green BOP in stocks that are creating a beautiful low volume base from a previous heavy volume uptrend. These charts are not showing up on my BOP scans or my price/volume scans. There are very few SMTX type charts out there. And there definitely are no HRZ, TESO, or AFSI type of charts.

Now, remember, I am not telling you to sell everything willy-nilly. I am advising smart selling of charts that are clearly showing you something is up. Either a climax run or breaks of key support; whatever. Don’t sell everything, if the chart still looks like AFSI or TESO. Sell a little. Raise SOME cash, since things seem to be slipping a little with the indexes.

There are two internal numbers I want to think about, before the bell. The new 52-week lows are higher than the 52-week highs again, by 167 to 156. This despite the market only being off around 3% from all-time highs. I am not sure if this number is telling us that the market is very weak underneath and/or is telling us that there is strong rotation from old leaders to new leaders. However, if it was rotation, I would think I would have more nice charts in my scans than I currently do. Maybe that will change.

The other number is the put/call ratio. The put/call is back over 1 at 1.02, signaling that investors got a little bit of fear put back in them. So this may help in the short-term to prevent too much further selling. And even though the NYSE short-interest ratio fell quite a bit today to 7.31 from 7.74, it is still very high.

The bottom line is this: it is a choppy market, I told you it was going to be a choppy market, I warned you about two to three weeks ago to keep longs small as the quality of new longs have been severely slipping, and I will continue to advise you to sit on the sidelines and wait till conditions become clear to the bull side or the bear side.

Right now, it is a mixed batch of pockets of strength and weaknesses out there. This is definitely not the time to be shooting the moon.

Aloha and I wish you the best. I will see you in the chat room!

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