Not Trusting This Predictable Rally

The almost too predictable oversold rally has occurred.  We were so oversold according to many different oscillators that I watch.  They were at such low levels that we knew a rally would occur.  On my radio show the past few days, I told listeners if they wanted to sell, they would have higher prices to do so.  Now, we have those higher prices.  If you want to sell, go for it.  Here’s your chance.  Of course, when the Dow’s up 200 as it was on Thursday, nobody wants to sell.  But, the rationale person sells at higher prices if they wanted to sell a few days ago.  The question now is whether this was just another dip on the way higher or was the pullback a part of something substantial?

Two things happened when we got this sell off.  First, it created a deeply oversold condition that almost insures a snap back rally.  But, more importantly, some damage was done that is causing investors to reconsider holding stocks.  Now, we know the economy is still improving.  If you’ve been following this blog, that’s been a consistent theme for several months.  More surprises regarding the economy are in our future.  But, there will be a time when the stock market has fully discounted this.  I don’t believe we’ve reached that ultimate top yet.  But, in the short-term, I’m concerned about the market.  When the S&P reached 1100 & the Dow reached 10000, we churned around for a few days and then fell down to 1030.  But, we also fell below the 50-day moving average, we had a little bit heavier volume, and the uptrend that’s been in place since March was broken.  Investors haven’t forgotten that.  In addition, we’re getting late in the year and many managers want to make sure they lock in gains before they erode after last year’s results (hedge funds get paid purely based on performance).  This is all causing a lot of volatility and big swings.  We could get up to the 1075 level in the next day or so based on the picture below.

S&P 500 11/5/09
The market could be developing a head and shoulders pattern which could signal lower prices ahead.  As I said, I’m not suggesting the top has been reached in the market but a correction down to 1000 or so wouldn’t surprise me a bit, especially if the dollar breaks above its 50-day moving average.  This head & shoulders pattern is just something to watch for over the next few days.

Now that we’ve had this oversold rally, I’m very cautious right now and would not hesitate selling a lot of positions on the first signs of weakness.  Tomorrow’s jobs report could be that first sign.  You know this is a backward looking indicator and doesn’t mean anything regarding how the economy will look a few months from now.  In fact, rising unemployment into a recovery is perfectly normal.  But, any number could be spun to be bad news and cause some selling.  No time to fall asleep.

This post published at www.karleggerss.com

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4 Responses to “Not Trusting This Predictable Rally”


  1. 1 Justin November 5, 2009 at 6:09 pm

    Karl,

    Great Blog and enjoy the show, would you suggest taking off a half position and letting the rest ride? I’ve sold pretty agressively on big runs out of April and into June only to find that the market still had legs and some of my stocks left me on the sidelines.

    I’d like to know your thoughts on the dollar, the UUP traded a lot of volume today and I believe it was suspended at one point. If there is a snap back in the UUP how will that effect stocks, I thought we would have seen a negative effect on commodities.

    Thanks
    JC

    • 2 keggerss November 9, 2009 at 12:49 pm

      As long as the dollar index (DXY) doesn’t gov above the 50-day mov avg, then the market’s ok. So, UUP isn’t a buy until then. Thanks JC.

  2. 3 John November 6, 2009 at 4:13 pm

    Hi Karl,Yesterday on your show you had mentioned that a large percentage of stocks were under the 40 day moving average. How would i go about seeing this for myself(novice investor) as a learning tool? Thanks, great show,i try not to miss one
    John

    • 4 keggerss November 9, 2009 at 12:49 pm

      John, the best place to see the ones above their 50-day mov avg is to go to stockcharts.com and use the symbol $NYA50R. That’s the easiest way to get it.


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