Strap In
The rubber band snapped yesterday as the elephants rushed to the exits at the same time. The downside was, of course, accelerated by the programs, which exaggerate any move.
The S&P 500 had advanced 11.2% from the May 27 low to Monday’s high of 1420.09, and closed yesterday at 1377.09. Downside volume accounted for 75% of the 760 million shares that traded on the day (NYSE). Not heavy volume, but we haven’t seen heavy volume either way lately. But there was certainly nothing but air under many of the big stocks. The institutions started taking some chips off the table right after the opening and didn’t look back. Some of the big stocks that were loved on Friday, like Texas Instruments, have lost close to 10% in two days.
As I mentioned yesterday morning that the erratic intraday behavior of many big stocks, increased program trading, and the very low VIX might result in a strong move out of consolidation, especially the Dow, which didn’t pop out the way the S&P did on Friday. But you never know which direction the market will take, and you shouldn’t try to predict. As a trader, just react.
With the overvaluations and the extended run in the S&P 500, especially the techs, maybe some of the institutions are concerned about the looming August-October period, which is very dangerous–especially at these current levels. Also, the bond market generally tops out 8-10 months before the stock market; bonds look like they made their high in October 98–nine months ago. I’m sure this hasn’t gone unnoticed.
Target Stocks Of The Day  In a market like yesterday’s, there obviously are not many attractive setups on the daily charts. But with a day like that, it’s always interesting to find that a large group of high-P/E, high-growth stocks get hit with extensive profit taking; the valuations are high and suddenly everyone says, “Oops, I better lighten up.”
Where does the money go? Well, most of the setups that look interesting today are really in the defensive issues, which you would expect, so I’m sure some of it was used to buy some of the following stocks: Johnson & Johnson [JNJ>JNJ], Proctor & Gamble [PG>PG], Colgate [CL>CL], Clorox [CLX>CLX], Abbott Labs [ABT>ABT], United Healthcare [UNH>UNH], Bell South [BLS>BLS] and Fort James [FJ>FJ].
| Program Trading Numbers | ||
| Buy | Sell | Fair Value |
| 11.45 | 7.55 | 9.50 |
A couple of reaction trades: Two high-flyers that could set up during the day because of their drops are Texas Instruments [TXN>TXN] and IBM [IBM>IBM]. They’ve both been hammered. Look for consolidations or trap doors in these and other high-flyers. If there’s any kind of trap door on the opening, you can rest assured that the specialists will clean out every share down there because they’re probably long and wrong because of yesterday’s extended down move.
Editor’s note: If you want to learn more about Kevin Haggerty’s trading strategies, click on the link below to go to his new series of tutorial articles.