Are These Stocks Setting The Stage For A Rally?
Nothing I have seen in the past couple of days
changes my stance. In fact, the action we are seeing only confirms my thought
that we are in the first serious correction since the low in August. The main
question is whether this turns into something much much worse. I will touch
upon that later.
I do want to go over some of the nonsensical
things we are all hearing.
We are hearing that when the leaders get taken
apart, it is the end of the drop. Let me be clear. This is one of the more
ridiculous thoughts one can hear. It is only a negative when leaders get hit.
We are hearing that the AAII poll is now
bearish…so that has to be bullish. This is only one poll…that sways like
the wind. I can read off a lists of other polls that show there is too much
bullishness…still.
We are hearing that the DOW is only down 4%…so
nothing is wrong. Nonsense! I have told you for years that the DOW is only 30
stocks and will always hold up better than the average stock in a downtrend.
The average stock has been hit hard…and the average growth stock has been
blasted.
And as usual, we are hearing from the permabulls
to not worry. Everything will be fine. You already know what I think of them.
I have my own ideas what is going on here…and I
am going to tell you. But I am telling you with the understanding they are
just thoughts on why things may be happening. I don’t usually do this but I
am starting to see some things that I think you need to know about. No matter
what, price and volume action will always take precedent.
Long bonds are rallying as yields are dropping.
TRANSPORTS and ECONOMICALLY-SENSITIVEÂ stocks are dropping. The yield curve is
flattening. CONSUMER STAPLE stocks are starting to outperform. Does this
remind you of anything? I have taught you in the past that when we see all
these things happen at once, the market is forecasting a slowdown in the
economy…which will be a negative for a market that is is still much too much
overvalued. Now how can this be? After all, the economy is never going to slow
down again…right?
My simple take is:
OIL is still at $48. Higher oil takes time to get
into the system. It may be time.
The FED has raised rates 5 times and has
telegraphed 2-3 more in the coming months.
George Bush is going to slow discretionary
spending to a crawl.
No more tax cuts…no more rebates.
Take all this and you have a huge loss of
liquidity in the markets. That’s my thought process We shall see how it plays
out. Keep in mind, this is all part of the business cycle…not the end of the
world.
^next^
TECHNICALLY,Â
all the support levels I told you to watch in my last report were
breached…and quite easily. We are continuing to see high volume down days
and low volume bounces. We are continuing to see horrid A/D figures on a daily
basis. We are continuing to see selloffs into the close on a daily basis. To
make matters worse, it is important to note the inability of the market to
muster anything on the upside even with oversold conditions. These are all
characteristics of a weakening market.
It is an intermediate-term negative that all major
indices are now below their 50 day averages. I will not turn longer-term
bearish until the major indices close below their 200 day moving averages. In
fact, expect the market to put up a good fight if ever they get to that
point…which by the way is only a couple to a few % below Friday’s close.
Shorter-term, one would think another bounce is
due as finally, I am seeing a bunch of put buying AFTER the recent drop. That
in itself will not cause a bounce but will possibly set the conditions for a
bounce.
As I have been stating since the first day of the
new year, continue to stay defensive. At the very least, there are hardly any
bases to buy off of while many stocks are just starting their downtrends. If
you must, you can probe the NEW HIGH LIST to see what areas are still hanging
in there. Just recognize that if this latest ugly continues, the market
usually comes and gets most everything. I wanted to mention GOLD. I do
believe that GOLD stocks are setting the stage for a rally soon and could
potentially be traded to the upside near-term.
Gary Kaltbaum