Thursday, August 2, Market Assessment

I don't think this is the Bottom.

As many had hoped, the 200-day moving average of the S&P 500 provided support yesterday, triggering a late-day bounce in the benchmark index. Volatility was very high, as the S&P probed below its 200-day MA several times throughout the session, but buying programs in the final thirty minutes of trading lifted the major indices higher, even pushing the DOW up 150 points in 30 minutes!

Blue-chips led the way, enabling the Dow Jones Industrial Average to gain 1.1%. The S&P 500 climbed 0.7%. The Nasdaq showed relative weakness, closing only 0.3% higher. The small-cap Russell 2000 and S&P Midcap 400 indices still lagged behind, advancing just 0.2% and 0.3% respectively. Total volume in the Nasdaq rose 6% above the previous day's level, helping to confirm yesterday's gains, but overall volume in the NYSE declined 9%. For most of the day, market internals were quite negative. During the last thirty minutes, the ratios dramatically improved, with advancing volume marginally exceeding declining volume.

It was bullish that the S&P 500 undercut its 200-day MA in the morning, running stops, then rallied sharply into the close. It was clearly indicative of bottoming action, but it's impossible to know how far the bounce will carry us. One scenario is that the S&P will retrace a third to half of its recent losses, then plummet back down to new lows. This is what happened when then the S&P last tested its 200-day MA in May of 2006. The other possibility is that a legitimate, sustainable bottom is being formed at the 200-day MA, though the major indices have a lot of supply to absorb if this is to be the case. Since we don't know how long the retracement will last, the best plan of action is to wait for the market's momentum to stall on the upside, then look for breakdowns below the hourly uptrend lines. Until the upside momentum runs out of gas, my plan is to sit on my current puts in financials, home builders and a few bellwethers (Pfizer, Staples, Kraft, Akami, and Baker Hughes) and look for short-term buys in ETFs that have low-risk chart patterns (QQQQ, XLF, and XHB). And my cash position still represents nearly 2/3 rds of my portfolio!

Summary: Short-term bearish; long-term bullish.

Tuesday, July 31, Market Assessment

Dead Cat Bounce!

After the worst week in several years for the major averages, stocks bounced yesterday, just before the end of the month. But volume totals were significantly lighter than Friday's heavy levels. Even though breadth was positive, as advancers led decliners by a 5-to-3 ratio on the NYSE and by an 17-to-14 ratio on the Nasdaq exchange, the number of new 52-week lows continued to trump new 52-week highs on both major exchanges. It's hard to say that the downturn is over when the S&P500 is only off 5% from its all-time high. But we may see further buying today, since many fund managers will need to "dress up" their portfolios on the last day of the month.

I expect continued deterioration in the Financials, Brokers, Homebuilders and Energies. VLO reports this morning, which should be the last good news from the oil patch. Of course, I'm out on a limb on this forecast, but the growing consensus for an economic slow-down will translate into less energy demand pretty soon.

My portfolio is filled with puts right now; I don't see a reason to go long on anything just yet, and I'm only holding two equities, GOOG and VZ, since I'm about 75% in cash. But I admit that we may have some terrific buying opportunities in August, and I look forward to that day

Summary: Short term bearish; long term mildly bullish

Friday, July 28 Market Assessment

It' Not Over, Yet!

Talk about brutal. Yesterday's market plunge was dizzying; at one point the DOW was down 440 points. When the smoke cleared, the markets had their biggest one-day drop in years, and the volume levels were the second highest in history! If trading curbs had not been put in, the market would have exceeded 3 billion shares! But, this downturn was expected, and I had covered myself with a number of put positions that made the day one of my most profitable this year. Ironically, I was most gratified when Cummins (CMI) rewarded my patience and bumped up 6+ points on blow-out earnings. It was my one long call position, and I went from being down $1600 to being up $400.

Now, what to do next?

It's clear that the financials are in the most trouble. Whether we have a bounce today or not, I plan to load up on puts on a number of big names, like Fannie Mae, Wells Fargo and Capitol One. The sub-prime contagion is spreading, and this is looking more and more like the savings and loan debacle of the mid-80s.

I am bearish on energy stocks, too. Especially the oils. I think we have seen the peak this year. With OPEC meeting soon, and their greediness very much in evidence, I expect the spigot to open up even more during the rest of the year. It's a rash thing to do, but I will predict oil at $60-$62 a barrel before February! The results from XOM and BHI (both of which were big misses) should tell us that the OIX and OIH party is over. Time to go short here, as well.

Another big step down is looming in the general market, also, but it may not happen as dramatically as it did yesterday. The S&P 500 should retreat another 100 points (it was down only 35 yesterday) to its strong support level at 1380. But it will take a while to get there. The DOW could go as low as 12650, which would complete a 9.5% retracement from its 14000 point, all-time high. However, that represents another 800+ points down, my friends. It's not safe out there.

I will shop very carefully over the next few weeks, but mostly I'll be shopping for puts.

Summary: Short-term very bearish; long-term mildly bullish

Wednesday, July 25 Market Assessment

It's Time to Get in Out of the Rain!

After a long, steady upward climb, the markets are turning down. It may only be a brief correction, but it's going to be nasty for a few weeks. Yesterday was brutal.

Key breaks of closely-watched support levels in several of the major indices triggered a massive sell-off across the board Tuesday. After gapping lower on the open, a reversal attempt in the Semiconductor Index ($SOX) helped stocks try to recover at mid-day. But the bears took control again in the afternoon, sending the broad market to new intraday lows. Small-caps got pummeled, as the Russell 2000 Index swooned 2.8%. The 2.3% loss in the S&P Midcap 400 Index wasn't far behind. The S&P 500 plummeted 2.0%, the Nasdaq Composite 1.9%, and the Dow Jones Industrial Average 1.6%. All of the major stock indexes closed near their worst levels of the session. Not a single important stock fared well, unless you include AMZN after the close, when they recovered the six-point drop they suffered during the day.

On a technical basis, one of the worst things about yesterday's selling spree was the accompanying surge in turnover. Total volume in the NYSE rushed 30% above the previous day's level, while volume in the Nasdaq similarly jumped 22%. The 2.07 billion shares that traded hands in the NYSE was the highest volume day in the exchange since stocks formed their recent bottom in March. The sharply higher volume that accompanied yesterday's losses caused both the S&P and Nasdaq to register another bearish "distribution day." It was the third such day of institutional selling within the past five sessions. One more this week and we can declare an official "bear market".

Market internals, particularly in the S&P, were about as nasty as could be. Declining volume in the NYSE crushed advancing volume by a margin of 14 to 1. The Nasdaq ratio was negative by a little more than 6 to 1. Further, the $TRIN reading in the NYSE was only 1.6. Levels above 2.0 to 2.5 are often considered extreme and unsustainable, but yesterday's reading of 1.6 tells us the selling was steady, not indicative of massive panic selling. The bottom line is that, despite the bloodletting, market internals gave no sign of a short-term bottom yesterday.

So what we have is not storm warnings, but a 50-mph gale beating on our windows. The upward trend is over. It will resume later this year, in my opinion, but not anytime soon.

Summary of Outlook: Short-term bearish, long-term bullish

Tuesday, July 3 Market Assessment

I'm Excited About July!

After two weeks on the road, it's good to be back on the trading desk. Interestingly, not much happened while I was gone, unless you count the over-hyped launchings of Blackstone and the iPhone as important, which I do not.

On June 12, the S&P closed at 1515, on July 2, it closed at 1519. Wow!

But, I believe we have gotten into something we sailors call "clear air", after several weeks of knocking back and forth in rough water. My prediction is that we are going to see a very strong set of quarterly reports from Big Cap International companies, which will propel the market up strongly in July. I'm looking for 1540 on the S&P and 4640 on the NASDAQ.

Later this week, I'll name some of the companies I am expecting to produce blow-out numbers. Stay tuned.

Summary: Short term bullish, Long-term bullish.