A Few Things You Need To Pay AttentionTo
As you know, I have been
talking trading range for several weeks. Every time the market tried
to break out, it was turned back. Every time it tried to break down, it held.
Well, several occurrences during the past week are now starting to give me
pause.
Anything can happen. BUT…there are several
things you need to pay attention to. Let’s start with Thursday’s action. I have
taught you in the past that reversals, both negative and positive, are most
often meaningful. Well, on Thursday, the market had every chance to break out of
its 2-month trading range. In fact, on an intraday basis, the DOW actually did.
Then, out of nowhere, the market was sold off hard. That type of negative
reversal almost always leads to near-term weakness. (By the way, the new mantra
of the bulls on every sell-off is that it was a mistake by a firm that sold off
too many shares.) It’s never a mistake when the market is going up).
On Friday, the S&P 500 broke below, and more
importantly, closed below its 50-day moving average for the first time since
March 14th. The good news is that this moving average is now in an uptrend while
in the past, it was declining. The bad news is that it counts.
It is also worrisome that breakouts are becoming
fewer and far between. Maybe it is just a matter of a much needed consolidation
of recent gains. Time will tell.
The EBAY factor worries me. As you know, EBAY and
the INTERNETS were one of the two groups that led the market off the lows. EBAY
gapped down on its recent earnings and has shown only distribution since.
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FINANCIALS are acting like the south end of a
north-bound mule. Followers of my commentary know I am a big proponent of
watching the action in BANKS, BROKERAGES, S&Ls. I have never seen a market act
poorly when FINANCIALS are in gear. Let’s take a look at what happened in the
past couple of weeks…and yes, it is about the bond market.
CITIGROUP breaks support as well as its 50 day
average. JP MORGAN does the same. WASHINGTON MUTUAL does a bungee jump.
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Take a gander at LEHMAN and BEAR STEARNS. The XLF
(ETF for FINANCIALS) tops on heavy volume.
Another point I want to make is that the number
of stocks and sectors that are rolling over is now picking up…but I see this
is as a function of how many stocks and sectors were in good shape. You just
can’t keep the high levels we experienced forever.
Before I talk about the positives, let’s review
support levels. Breakdowns occur below S&P 974, DOW 8970 and a 1675 NASDAQ. A
closing break on all three will lead to a correction of intermediate-term
consequence. You also best keep an eye on the SEMIS. So far, the SEMIS are
holding like a rock…but a break below 373 will only make matters worse. As I
have told you a thousand times, the SEMIS have been a fabulous leading indicator
of the direction of the market.
BUT…all these negatives should not change your
game plan much. As I have been saying, continue to keep your foot off the pedal
until more breakouts occur or major averages break out again…and yes, major
averages are not far from breakout points. That’s how tight the trading range
has been. If no breakouts occur, you have nothing to do. If stocks you are
holding break support, you get taken out. The good news is that there still
remains a decent number of stocks that are potentially playable. You just have
to play them a little bit lighter at this juncture.
Gary Kaltbaum