Merrill Starts Sinking… Guess What's Next
By Jeff Clark
February 13, 2007
How poetic would it be if the market peaked on the same day that the first hedge fund went public?
Now, I don't know if that will turn out to be the case or not. But it's certainly interesting that the market opened up strongly on Friday. Then, as soon as Fortress Investment Group (FIG) opened for trading – at an enormous premium to its IPO price – sellers took control and the stock market headed lower.
The warning signs of a stock-market correction have been looming overhead like a flock of seagulls over a freshly washed sports car.
Yet investors continue to drive with the top down.
We don't mind taking the old jalopy out for a spin every once in a while. But we keep one eye out for rain, and the other watching for birds.
One bird that caught our attention is the canary.
As I've covered in these pages, shares of Merrill Lynch (MER) serve Wall Street as the proverbial canary in the coal mine. When the canary dies, it's time to get out of the shaft. And when MER rolls over, the market follows shortly thereafter.
Take a look at the recent action in Wall Street's canary…
Last May, MER peaked on the day the company announced record earnings. It then dipped below its 50-day moving average and ultimately lost 20%. The S&P 500 followed shares of MER lower and gave up 8%.
Last month, MER peaked on the day the company announced record earnings. Last Friday, it dipped below its 50-day moving average. Does anyone care to guess what should come next?
Please understand that I'm not suggesting you should sell all your stocks, construct a bomb shelter in your basement, and then hunker down for a nuclear winter.
But I am offering you the same cautionary advice your dear mother gave you when she told you to look both ways before crossing the street. She didn't tell you not to cross the street. She told you not to get hit by a truck.
Go ahead and trade stocks from the long side. But don't go chasing momentum plays at this point… And if you're looking to put a big chunk of money into stocks, you'll likely get a much better buy point in a few months.
The smart trade right now is to look for beaten-up value trades that won't get crushed if the market gets hit by a truck… or a flock of seagulls.
Best regards and good trading,
Jeff Clark
