Is Something Different Developing?

The last two days, we’ve seen kind of a rotation out of the strong “stuff” and into the weak and beaten down “stuff”.  Are materials, agribusiness, & energy all turning and heading lower for weeks and potentially months?  While at the same time, have financials and homebuilders bottomed?  I think we’re at the end of the quarter and there is some locking in gains on some of the winners.  At the same time, there are some great bargains out there in areas such as money center banks.  So, maybe traders are nibbling on that with their profits.

But, I’m very suspicious of this up day.  In the past few weeks, we’ve seen days like today where the good is going down and the bad up.  What we really need to see is a broad based rally with good breadth.  So, I believe we’re seeing an oversold rally.  The percentage of stocks above their 40-day moving average is about 18%.  25% is typically oversold.  Fear is near a level it was in early June.  Some fear but not enough for a sustained rally.  I think this is an oversold rally that could take us up 2-3% on the indexes but will more than likely need to be sold into.  We need to make a new low in the markets to draw some real fear.  If we get that over the next couple of weeks, then we could really be putting in a meaningful bottom.  Remember, technicians said we had a successful double bottom in the spring.  What about a triple bottom?  Bear markets end where nobody expects them to.  So, new lows could be that place.  There is still no demand and plenty of supply.  Because we’re oversold, the market could go up higher on the Fed decision because they will spin it into a positive event.

Bottom line, continue to use sell disciplines and don’t be afraid to continue to trade.  I’m not covering shorts at these levels even though I know we’re oversold because there are too many indicators that aren’t extreme enough.  I think this will be an oversold rally similar to what we saw a couple of weeks ago.  It was the rally that really didn’t happen.  So, I’m still cautious but wouldn’t be surprised to see some up days.

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