Tuesday, February 5, 2008
Now the fat lady is singing.
It's official. Stocks are in a bear market. Here's an updated monthly chart of the S&P 500 plotted against its 20-month exponential moving average...
The S&P 500 ended the month of January below the moving average line, and – in my book – that makes it a bear market.
The last time the S&P fell below the line was back in August 2000. You can see the thrill ride investors endured for the next two years.
But, don't worry. Even in bear markets, traders can profit by owning stocks. Some of the strongest rallies occur in bear markets. Heck, we're smack dab in the middle of a countertrend rally right now. We've seen some terrific gains over the past two weeks – and there's more to come.
You may recall the last time I showed you this chart was on January 25. Back then, the S&P was at 1,325. The market was oversold and looked poised to rally – if only to shake out the overly aggressive short sellers and throw a bit of mud on the whole idea of a bear market.
The S&P 500 is up about 70 points since then. And if this bear market plays out like the last one, the rally still has a little more room to run. Back in 2000, the market rallied back up to "kiss" the 20-month exponential moving average line from below. A similar move today would push stocks up toward the 1,418 level.
So far, financial and homebuilding stocks have captured the biggest gains from this bounce. That makes sense, since those sectors were the most oversold. Now, however, the banks and the builders are overbought and appear to have gotten a bit too far ahead of themselves. Further gains in those sectors are unlikely.
It's going to take leadership from another sector to keep this bounce going. For my money, I'm betting on the semiconductor stocks. Much like the financial and homebuilding shares, chip stocks took a beating last year – so there's plenty of fuel for an oversold bounce. The semiconductors came to life last Friday when the Philadelphia Semiconductor Index gained almost 6%. That's a pretty good sign the sector is ready to lead.
So, if you want to capture some gains as the market rallies back up to test its 20-month exponential moving average, then bet on the chip stocks. But be sure to take profits quickly. This is a bear market, after all. And the real big gains will come from betting on the downside when this rally ends.
I'll share some good short-sale opportunities in future essays.
Best regards and good trading,
Coal still rising... Massey Energy, International Coal, Alpha Natural Resources, and Fording Canadian Coal hit new highs.
Oil nears $90... Mariner Energy, BPZ Resources, Union Drilling, and Clayton Williams make 52-week highs.