Friday, August 3, Market Assessment

Look Both Ways Before Crossing

As bullish as the commentators were after Thursday's nice triple-digit climb, storm clouds still darken the horizon. The latest round of better-than-expected earnings boosted optimism and stocks jumped at the end of the day (once again!). But volume totals on the exchanges were lower than Wednesday's levels which is a less than ideal scenario. Normally, we like to see volume expand as the major averages advance and contract when they decline. Breadth was positive as advancers led decliners by nearly a 2-to-1 ratio on the NYSE and by a 17-to-13 ratio on the Nasdaq exchange. However, the number of new 52-week lows continues to beat new 52-week highs on both major exchanges. If the bull is coming back, he's not here yet.

So we're not out of the woods. In fact, I believe we will see this sideways action -- I'm assuming another down Friday* -- for most of August. It would be nice if the market could pick a direction and just go there, but it's going to be a while before the financial jitters are settled.

From here on out, I'm looking for pull-backs on some good stocks. Today I bought BEA Systems on a pullback below $40, and a few more puts on the Homebuilders index. Naturally, the homebuilders all bounced up Thursday, but everyone knows that they still have room to fall. Every bone in my body says that we're heading for an economic slow-down in the 4th Quarter, so I'm focusing exclusively on defensive stocks, while keeping a sharp eye on the bellwether tech stocks to see if they start to move as a group.

*After I wrote the section above, the DOW crashed down over 280 points, confirming my belief that the market is still overbought, especially in the financials. Oil is also tumbling, but that may take a while longer. Katy, bar the door!

Summary: Short-term bearish, long term mildly bullish.