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Newborn Bulls May Be Headed for the Slaughterhouse

By Jeff Clark
Thursday, March 19, 2009

What a difference a week makes. Investors have gone from singing the blues to cheering, "Happy days are here again." But be careful. The blues are ready for a comeback. As oversold as the market was last week is as overbought as stocks are today.
 
We were looking for a rally to kick off last Tuesday, and we knew it would be huge – something along the lines of the gains we saw coming off the November lows. What we've seen, however, is beyond remarkable. In just seven trading days, the Dow Jones Industrial Average has bolted 939 points higher. That's a gain of 14%. Six of the last seven days have been higher. And the one losing day saw the Dow drop a measly seven points.
 
Not surprisingly, the fast gains have launched a stampede of raging bulls desperate to get in on the action. It seems everyone who feared the sky was falling last week now sees nothing but sunshine and lollipops. So it's time for a bit of a pullback – nothing too serious, just a good old-fashioned short-term rout to turn the newborn bulls into veal cutlets.
 
More gains are ahead. But stocks don't go straight up forever. And buying into this market right now could turn out to be as foolish as short selling stocks last Tuesday.
 
Here's a look at one of my favorite short-term indicators...
 
 
 
This is a daily chart of the S&P 500 along with a graph of three-period and five-period "stochastics."
 
Stochastic measurements display momentum. I use them to gauge overbought and oversold conditions. Stocks are oversold when the stochastics drop below 20. They're overbought when the measurement rises above 80.
 
Buy and sell signals (marked with circles) occur when the stochastics reach oversold or overbought levels and then the five-period stochastic line crosses above or below the three-period stochastic line. As you can see from the chart, however, over the past few months the signals have been off by a few days.
 
But every signal has been profitable.
 
The last buy signal, for example, triggered on March 4 when the S&P 500 closed at 712. While anyone trading off this signal had to endure another 50-point drawdown in the index over the next three days, it was looking good a few days later.
 
Today, however, we're looking at a sell signal. In fact, the sell signal triggered on Monday when the S&P 500 closed at 754. If history is any sort of a guide, then the coming selloff is going to knock the index back down below that level. My guess is we'll probably see the S&P 500 drop all the way back to 725 or so.
 
Of course, no technical indicator is 100% right all of the time. But the odds favor a selloff here. Aggressive traders can try their luck with a few short positions. Everyone else should wait for a buy signal off this indicator before jumping in headfirst.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux
Market Notes
Gold rallied from $884 to $932 yesterday after Fed announced it will buy $300 billion of Treasuries.
 
Natural gas falls below $4 per mcf on fear of oversupply... U.S. Natural Gas ETF down 40% this year.
 
Cheap date nights boost movie-rental firm Netflix... up 42% this year.
 
Earnings today... Barnes & Noble, Blockbuster, Discover Financial, FedEx, Palm, Prudential, Ross Stores.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%