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.