The Definition of Ugly
Today's market was almost the exact definition of ugly. Actually it is the exact definition of an ugly bear market. The Russell-2000 closed at 680 and exactly a -20% drop from the October high of just over 850. A 20% drop is considered a bear market. The other indexes although very ugly are still in the ranges of -10% to -15% in their declines. The reasoning for the drop is the spreading subprime slime causing the financial stocks to post the worst earnings in recent history and the subprime housing recession pushing the entire economy over the cliff. At least that is the consensus opinion.
Where is the Fed in this disaster? Bernanke has been all over the TV screen proclaiming the Fed does not see a recession but some feel he should remove his head from the sand to see more clearly. There were various expectations for rate cuts all week and none appeared. I find it strange that the Fed would wait another 12 days until the January 29th meeting before taking the next step. It is entirely possible that we could see a repeat of their last move with a rate cut before Friday's open. It is option expiration day and like last time the ensuing short squeeze would be huge.
In the oil market the price of oil closed under $90 for the first time in a month as recession fears produced worries over decreased demand. That material drop in demand has yet to appear but we could see a small decline over the next couple months. It would not be material but probably enough to weaken oil prices further going into the typical spring price slump in late March and early April. Just remember oil was $100 just two weeks ago and could return there just as quickly if the fundamentals change.
We were stopped out of nearly everything with a stop loss and there was no change in the long-term outlook. It is simply a market correction that caused traders to take profit regardless of how firmly they felt about their positions. I have to admit the severity of the drops caught me by surprise. Nothing has been spared the pain.
With every good correction comes opportunity and we have a lot of opportunities today. The markets are reaching a capitulation point and a monster reversal could occur at any moment. The Dow is only about 100 points above its March-2007 support at 12050. This would be a -1,675 point drop from the December highs and clearly a point where buyers could appear. Should that support fail and we really go into a bear market decline the next support would be 10700 and nearly a -3,000 point drop from the Dec highs. That is a dreary thought but it is definitely possible.
Personally I would prefer to focus on the opportunities the market has brought us. The energy and global infrastructure plays are still the best sectors because the subprime problem has not impacted the daily lives of the rest of the world as it has in the U.S. I scanned my list of favorite stocks and came up with the best targets for new long entries should the market decide to respect that Dow 12,050 support. I am not saying you should rush out and buy the stocks on this list tomorrow but they will be the ones we are watching to rebuild the portfolio when the smoke clears. Consider this your personal watch list for tomorrow and be ready to jump if a rally appears.
The prices listed are levels I would buy either today or on a continued dip. These stocks have value that was not destroyed by recent economic changes. They are simply falling on profit taking in a bear market.
CAM decent support at $42
CLB support now at $111 (200-day) and further support at $100
CVX support at $80
FLR cautious support at $112 followed by support at $100
FWLT now at $128, additional support at $120 and $100
JEC now at $70 and support at $60
MDR on a dip to $40
MOS now at $80 and again on support at $60
NOV now at $60, next support $50
PBR now at $90, next support $80
RIG now at $120, next support $110
VLO very oversold with strong support at $50
The solar stocks, especially the leaders, have been hit harder than oil because they had a lot of profits to capture from their triple digit gains in 2007. I don't know if it is time to buy just yet but they are at levels that appear very appealing.
FSLR -143 points from 283 to 166, looking for support at $150 and $130
SPWR -64 points from 144 to 80, potential buy now and again at support at $60
The internals over the last three days suggest we could be in the middle of a capitulation event but Friday is option expiration and that produces lots of extra volume. That means the next two days could be very volatile. It also provides a fertile environment for any surprise Fed move. If the Fed does not appear on Friday I would look for the volatility to climax on Tuesday. Be prepared but be careful.