Don't buy it! The avalanche/decline line is picking up speed.
The markets pulled another miraculous recovery from another capitulation event this afternoon but I am not convinced yet. The DOW was down over -150 points at 2:15 when buyers materialized out of nowhere. Analysts theorize that several buy programs were triggered when the DOW broke 10500 and the spurt of buying sent short running for cover. The Internets pulled back from the brink of another disaster with stocks like YHOO, INKT, EXDS posting strong gains after being strongly negative at midday. EXDS was down over -$7 but closed +5.00. YHOO was down over -6 but closed up +6.31. INKT gained over +$8 after starting the day negative.
By all standards the huge rebound would be buyable BUT the most visible indicator is the avalanche/decline line. Advances are becoming few and far between with decliners beating advancers by 3:1 on the NYSE and 2:1 on the Nasdaq, and this is after the strong bounce firmed the numbers. Until the advancers pull ahead of the decliners you should not buy this bounce. The new highs also fell victim to new lows by 41 to 332 on the NYSE and 45 to 278 on the Nasdaq. This is not a buyable market.
Another factor that could have sparked the bounce was the breaking of the 200 day moving average by the S&P-500. This was the first time the S&P has traded under the 220DMA since Oct-1998. Secondly the S&P broke the -10% barrier to officially signal a correction in the broader market. Either of these events can trigger buying by technical traders. This does not mean they are right. They are just playing the historical averages which favor a market bounce at these technical points.
Even though the S&P broke the -10% barrier today the DOW is only down about -6%. The most widely watched and reported index is only comprised of 30 stocks and is weighted strongly to energy and cyclicals. There are 3100 stocks on the NYSE and the DOW cannot represent the true movement of the market. The cyclicals are defensive stocks and attract money when the other DOW stocks are selling off. The oil stocks are basking in the glow of high oil prices and are helping to hold up the index. Even with the bounce today the market is continuing to follow the pattern of lower lows and lower highs. On 8/2 the DOW low was 10615, 10614 on 8/3, 10565 on 8/5, and 10549 today. The highs were 10829 on 8/4, 10818 on 8/6, 10762 on 8/9 and 10714 today. This may seem boring to read but if the pattern holds we are looking at a retest of the DOW's real support at 10500 or even 10400 very soon. Our recent trading range is continuing to trade lower and it will continue until the buyers start winning the battle.
The buyers are still waiting on the sidelines and there is still nothing to cause them to want to be in the market. The next earnings cycle is still two months away and this is typically a weak month in the market. This is not the time to be in calls. We got several emails last week about our call plays losing money. No kidding. Obviously some people are still not reading the commentary. We have been telling people for weeks NOT to play calls until the market trends change. As I have mentioned many times before, we list the call recommendations as possible plays WHEN THE MARKET RECOVERS, NOT NOW! If you must play calls we have recommended ONLY buying calls on a strong dip to the bottom of the trading range, like today, and then selling them on any bounce to the upper end of the range. As long as the range is trending lower you must sell quicker every time. This is a very risky strategy and I do not recommend it. I recommend waiting on the sidelines or shifting into put plays. Enough preaching but it really aggravates me to have someone blame us for losing money on calls when the market is tanking like we predict.
The main reason analysts are blaming for the recent market drop is still the interest rate problem. Yes they will raise rates on the 24th and yes they will probably raise rates at the next meeting also. Live with it. The September FED fund futures are showing a 100% chance of a +.25% raise in August and the December futures are calling for another +.25 by December. Both of these raises are already priced into the market and we do not feel this is the reason for the current weakness. The market is weak because there are more sellers than buyers and I think the reason is the fear of history repeating itself from the last two years and Y2K fears. I was at a picnic on Sunday and two people in separate conversations, who did not know me were telling others they were selling stocks now to avoid the OCT Y2K rush. Multiply this by 100,000 picnics this weekend and you see why the advance decline line is accelerating downward.
CSCO announced earnings after the close and beat the street by +.01 with a $.21 actual. CSCO traded up after the announcement and this positive tech event may help hold up the Nasdaq tomorrow. The Nasdaq needs serious help. The Nasdaq was down almost -80 points at midday before the Internet sector caught fire and pulled out of its death spiral. All of the Nasdaq majors finished negative. MSFT, DELL, CSCO, INTC, WCOM were all down. With the majors trending down the Nasdaq has an uphill battle to rally. MSFT may not be a contributor anytime soon with the Justice Dept now saying that they did find that Microsoft was a monopoly and did employ monopolistic practices in controlling their market.
EBAY lead the charge for the Internet rebound after they reassured analysts that they had a handle on the outages and business was good. EBAY finished up +9.63 today but they had been beat up badly in recent days. Internet IPOs continue to flounder as Hotjobs (HOTJ) closed under its reduced IPO offering price. Blockbuster will be out tomorrow after also pricing at less than expected as a result of weak demand.
Adding another match to the market fire, John Bollinger said today he had increased his cash position to 10% and planned to increase it to 30% in the next two weeks. Another bull bites the dust. Al Goldman from AG Edwards, lowered his bottom target for the DOW again today to 10,400 after the Richmond Fed reported that manufacturing and services were gaining momentum and wage pressures were adding to inflation. The DOW is not getting any help from the transports. All the stocks in the Transportation Index were down today except ROAD. The index closed down -83 after being down over -100 at midday. It is now trading under its 200DMA and is negative for the year.
The Russell-2000 is also failing and is within two points of trading below it's Jan 4th starting point. It did bounce off it's 200DMA today.
Remember the bear trap rally from last Thursday? The steel jaws slammed shut on us the very next day as the market continued downward. Also remember that NOTHING goes up or down in a straight line. 2-3 days down will bring a technical rebound. 2-3 days up will bring a profit taking session. Watch closely the internals of this market before committing funds to call plays or buying stock. The yield of the 30yr bond broke above 6.25% at midday. This is a level that has not been seen since Nov-97. It will lure cash out of the markets to the safety of bonds in the face of Y2K unknowns.
Now after painting this bleak picture of the markets let me try another analogy. Visualize a face off in a hockey game. The ref drops the puck and each player tries to anticipate the drop and bounce on the ice. The winner may setup his team to score. Many stocks are like pucks this week. Traders with itchy mouse fingers are trying to decide when they will hit bottom so they can be the first to swing and chance a big score. The problem here is no one knows where the bottom is going to be. Traders swinging early will be penalized by having to sell quickly for a loss if the drop continues thereby increasing the drop rate. The player who waits too long is penalized by having to pay several dollars more than the lucky person that accidentally picked the exact bottom. This process causes many false starts and stops. Watch the internals NOT the stock to decide when to swing. We could see several more bounces before we see the bottom.
Don't forget the PPI is due out Friday!
Please, if you must play, pick your entry points carefully.
Good Luck, Definitely, sell too soon.