Welcome 4th Quarter

The stock market opened the 4th quarter with a whooping.  I guess all the speculation that the market was propped up in the past few days for window dressing was accurate.  The Dow Jones sold off to its lowest level of the day and closed down 203 points right above 9500.  The more volatile areas were the ones that got hit the hardest today.  The dollar was up which meant everything else was down.  Basic materials were down over 4%.  Utilities were the strongest group ONLY down 1.86%.  But, why the sell off and why was it so sharp?  Is it simply vibration or something real?  All the technicians got very nervous last Wednesday when we had what’s called and outside reversal day (Fed decision day).  That means we went to new highs and then closed at the lows and it was on more volume.  So far, the move has been vibration.  Before today, we had only dropped maybe 2% or so while many of the short-term oscillators worked down to a level that would be called oversold.  A day like today though will take you to oversold in quite a hurry.  Investors were looking for any reason to sell and the ISM data gave them that reason. This is one of those days we remember why we have bonds and cash.  There wasn’t really a place in equities to hide today.  None of the Dow Jones 30 were up on the day & only 22 of the S&P 500 stocks were up on the day.

This could be the beginning of a more serious correction but is it the absolute top for the year?  I don’t think so.  Let’s sit back and examine really why we’re here and has anything changed.  The economic recovery has been stronger than most (not this site) thought it would be.  That caused a major shift in asset allocation.  More risk was taken on in the form of equities, high yield bonds, etc.  You would only be selling stocks if you thought they were extremely expensive (which they’re not) or you thought the economic recovery was over.  I don’t believe the economic recovery is over but as long as a lot of people disagree with me, we need to respect them.  The herd can stampede for a while.  If the economy does keep improving and, then this is going to be a fabulous buying opportunity.  My fear indicator which has been an excellent tool for buying in a a good market is showing the most fear since January of 2009.  You may think that’s not good but it’s often used as a contrarian indicator.  It’s not at a level that gives us a green light to run wild, but it’s moving that direction.  A little fear (the wall of worry I had been mentioning in previous posts) isn’t bad.  You need doubters to eventually be convinced things are good to ultimately go higher.  From a fundamental standpoint, I still believe we have more improvement.

From a technical standpoint, there was some levels traders were watching today that broke.  In addition, it was just a nasty day all around.  Downside volume was well over 90%.  Decliners beat the tar out of advancers.  One strange tidbit was the fact there were a number of new highs.  Barely any new lows.  All in all though, not much to be excited about.  We’re approaching the 50-day moving average on a lot of the indexes and that could easily break tomorrow.  Anything more than another 2-3% on the indices would cause me more concern.  Right now, it’s just another correction.  It just happened very violently today.  As I’ve said on my radio program, I’d rather see one 200 point down day than 4 50 down days.  This kind of day really gets the fear into the market which causes faster snap back rallies.  I think one of the worst things investors can do is sell on a day like today.  Often times, you get at least a few days of a bounce.  So, if you’re really wanting to sell, it’s typically better to wait for a bounce.

One of the few bright spots today were treasury bonds.  At the Houston strategy session I had a few weeks ago, I pointed out that TLT could be a nice trade.  It went above its 200-day mov avg. today and looks  poised to go higher, especially if we have weaker equities in the next few days.  Inflation is not a problem right now and plenty of people don’t think it will be a problem anytime soon so they feel safe buying treasuries.  I think for a trade along with the dollar that’s fine, but longer term be extremely careful.

Overall, I didn’t make any moves today but watching closely for exits & entries.

Just a reminder, I’ll be in Houston tomorrow for the Loral Langemeier event.  You can register at http://www.bizradio.com

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October 2009
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