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I'm Playing Stocks from the Long Side Right Now

By Jeff Clark
Thursday, May 27, 2010

"Dead cat bounce" is a phrase describing the temporary and sometimes violent rally that occurs in an asset once it hits bottom. The farther the fall – the larger the bounce.
 
However, no matter how high the bounce, the dead cat will always fall back down and hit the bottom again. And there are two ways to trade it… We can trade the bounce, or we can trade the decline back to the bottom.
 
Stocks are primed for a dead cat bounce. The S&P 500 is down 15% or so over the past month. Investor sentiment, a contrary indicator, is overwhelmingly bearish. The S&P 500 is 60 points below its 20-day exponential moving average line (a distance of 30-50 points is extreme).
 
Tuesday's rally during the final hour of trading looked like it was the start of a bounce. But yesterday's last-hour reversal dropped the cat down a few more floors.
 
To be sure, it's tough to trade stocks from the long side right now. Every rally attempt is hit with selling pressure, and the news flow is decisively negative. Bullish traders need to be nimble and take profits quickly.
 
Nonetheless, there's a cat ready to hit the bottom. And when it bounces, it's going to be a whopper of a rally. After all, we're heading into the end of the month and it's a holiday weekend. Both of these periods tend to be bullish for stocks.
 
Over the next several days, the S&P 500 could rally back up to 1,100 or even 1,130 if the bulls really take control.
 
Remember, though, dead cats always fall back to the bottom. Once we get a bounce in stock prices, we're likely to come back down and retest the lows.
 
As a trader, I'm playing stocks from the long side right now. But I'll be quick to take profits and I'll be looking to short stocks aggressively if the S&P rallies back toward 1,130.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux Recent Articles
Market Notes
Fear index dips under 30… the VIX hits its lowest level in more than a week as stocks, commodities, and U.S. dollar all trade higher.
 
Discount store stocks all set fresh 52-week highs… Dollar General, Dollar Tree, and Family Dollar soar as plays on possible "double dip" recession.
 
Biotech behemoth Gilead sinks to fresh 52-week low… shares have quietly fallen 25% in three months.
 
Earnings today... Costco (discount stores), H.J. Heinz (food), Tiffany (jewelry).
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%