Just a few thoughts for tonight...
When I wrote back on April 28th, the market was showing signs of weakness
and of topping out. From that newsletter the following appeared:
<<. And the 15 day MA has turned downward. It had
been steadily rising since late January and peaked for the time being last
Friday. The dow hit a high of 9213 last week (just 13 points above my year
end target...pretty lucky , eh).....>>
Then on May 7th after the new lows on the NYSE had spent a few days above
40, I wrote,
<<there has been light volume in the
past couple of sessions on the NYSE (not bad, low volume on the way down,
but then again we had some low volume during the last up). New lows back
below 40...pretty important. But the new highs aren't that strong.>>
Well since then , the new highs continued to be anemic (showing signs that
the relentless buying strength from late january to early April was
gone)....and in my opinion, of greater importance, today marked the 5th
consecutive day with new lows on the NYSE above 40.
This is a huge (I mean HUGE) red flag.
When this occurs, the market is either in the midst of a correction or about
to experience one. If memory serves me correct, this indicator has not
given many false signals...there have been a few, but not many. On top of
this, the 20 day MA on the Dow has flattened out and looks like it may start
to dip....another sign that things have been weak over the past 4 weeks.
This is not a buy the dip time for the market. Back in early April, the
newsletter was suggesting to use strength to sell into.
The question now is, where is the support? Once again, initial support
would be at the 50 day MA or as of tonight, 8990.74...which isn't too far
away. If the Dow closes below that and the new lows are still above 40, the
100 day MA would be next, but I would venture to say that a stab at the 200
day MA would be in the cards. As of tonight the 20 day MA is at 8204.96.
That would be about an 11% correction from the Dow high.
If you want to hold onto equities, a suggestion would be to pick up a few of
the in the money puts on the Dow on any further strength...but as with all
options, don't put anything in that you aren't willing to give away. The
other alternative is to be in cash.
The next question is, "Is this the beginning of a bear market?"
Personally, I am not convinced that it is. Interest rates are low and if
they don't rise, the 11% correction, would put the market at a relatively
fair value. Obviously, a domino effect of money leaving mutual funds would
turn any correction into a bear market, whether it was jsutified or
not...(but something tells me the Fed would step in to curb that).
that's about it for now.
Just some thoughts.
Paulo
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