Eeyore’s Rain Clouds Hover Over The Market

When you are caught in the rain, you don’t need a meteorologist’s weather forecast. Afterall, you are soaking wet. When the NASDAQ crashes more than 4% in a day, you don’t need a stock prognosticator to tell you the market is falling. You see the losses raining on your portfolio.

What investors want to know is when the clouds will break, and the sun will shine. Before we get to the answer, it is important to look at Monday’s trading and try to understand what might be next. Unfortunately, it’s not good news. Thunder, lightning, and downpours are likely to be a part of Wall Street’s continued direction.

A couple of observations as to why Eeyore’s clouds could continue to follow investors.

A – Prices gapped down to start trading in the new week. The NASDAQ closed at 12,144.66 on Friday and opened at 11,923 on Monday. The 221.66-point difference without a single share of volume is called a gap, down in this case. The sad news is that gaps tend to signal trend continuation. Once again, down in this case.

B – Monday’s selloff occurred on light volume. That’s not usually how bear markets end.

How much lower can the NASDAQ go? The most obvious answer is the index’s 200-week moving average of 10,701.86 and rising. The second most likely target is the 50-month average at 10,500, which is also a ledge of technical support.

However, prices could lift some in the immediate term as the NASDAQ’s daily and weekly Relative Strength Index readers are entering oversold readings. Investors might be wise not to overreact if prices swing aggressively higher. Sudden bullish moves are a hallmark of bear markets. They can be traps that lure investors in only to smash them ala Michael Chandler’s foot on Tony Ferguson’s chin (google it – although you’re not the one getting kicked, it still hurts).

As we said last week, the trend is your friend and to trade the trend until it is no longer the trend. In this case, the trend has been to use any strength to sell underperformers to build cash and then use the cash to buy leaders when the rain stops.

Which brings us back to the question of when will we have a sense that the clouds could break and the sun peeks through?

It’s been our experience that crappy markets end on what’s known as a blowoff day. They are ugly, prices crash hard, everybody is selling, selling, selling, and you can hear the trumpets in the sky signaling the end of times. Volume is the telltale that it’s a blowoff bottom; volume will be through the roof. So many people sold that there are no sellers left, and that’s when the clouds will likely part and the sun will shine on bulls once again.

Until then, rain continues to be in the forecast.

SECTOR WATCH

Energy and Utilities were about the only sectors that had a good week last week. However, they didn’t hold up in the face of Monday’s  smackdown. This could be a case where a falling market sinks all ships, so we’d rather “be out of the market wishing we were in than in wishing we were out”.

Rich Meyers
Investing Trends