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The Best Mistake to Make in Today's Market

By Jeff Clark
Thursday, January 10, 2008

Timing is everything.
 
The market started strong out of the gates on Tuesday. But after the first hour, the selling pressure in the financial stocks spread to the rest of the market, and the S&P 500 dipped down toward the critical 1,405 level.
 
Then the buyers stepped up and rallied the index all the way up to 1,425. Just when it looked like we would finally get our long-awaited bounce, the CEO of AT&T said something about weakness in its consumer business.
 
Spooked investors ran for the exits. The S&P sliced right through 1,405, and it was a straight shot lower all the way down to 1,390.
 
I expected the market to fall through the 1,405 level sometime within the next week or two. I did not, however, expect it to happen on Tuesday. And I expected we'd see a bit more of an oversold bounce first.
 
That didn't happen.
 
Yesterday, we were facing a grossly oversold market that had broken through yet another critical support level. The next support came in somewhere around 1,375. And if that failed, we could have headed as low as 1,250.
 
Early weakness dropped the S&P all the way down to 1,378... and then the buyers showed up.
 
In the final hour, the market erased its losses and rallied hard into the close. By the end of the day, the Dow was up 148 points and the S&P regained the critical 1,405 level, closing at 1,409.
 
Now, the obvious question is... where do we go from here?
 
The market has suffered a lot of technical damage. Even if we do get more of a bounce from current levels, it will likely fail, and we'll see a retest of the lows within the next few weeks. If the financial and semiconductor stocks can outperform the market on that retest, then we'll have the first indications that the bottom is finally in.
 
But I can't recommend shorting stocks at this point. It's a bad idea to short stocks into an oversold market. Yes, it would have worked out well on Tuesday. But oversold markets have a nasty habit of putting on sharp rallies, just like we saw at the end of the day yesterday. And folks who short stocks into weakness often end up covering in a panic when prices rise quickly.
 
So until we get a washout decline in the overall market (and the financial and semiconductor stocks show some relative strength) or until we get more of an oversold bounce (one that whipsaws the overly aggressive bears), it's best to err on the side of caution and keep trading to a minimum.
 
Best regards and good trading,
 
Jeff Clark




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Market Notes
"The basics" lead the market... Coca-Cola, Pepsi, and Reynolds hit new highs. Colgate-Palmolive at an all-time high.
 
Cable companies sell off... Knology, Comcast, and Time Warner make new lows.
 
Miami condos still crashing... homebuilder WCI down 53% today.
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%