The Best Mistake to Make in Today's Market
By Jeff Clark
January 10, 2008
Timing is everything.
The market started strong out of the gates on Tuesday. But after the first hour, the selling pressure in the financial stocks spread to the rest of the market, and the S&P 500 dipped down toward the critical 1,405 level.
Then the buyers stepped up and rallied the index all the way up to 1,425. Just when it looked like we would finally get our long-awaited bounce, the CEO of AT&T said something about weakness in its consumer business.
Spooked investors ran for the exits. The S&P sliced right through 1,405, and it was a straight shot lower all the way down to 1,390.
I expected the market to fall through the 1,405 level sometime within the next week or two. I did not, however, expect it to happen on Tuesday. And I expected we'd see a bit more of an oversold bounce first.
That didn't happen.
Yesterday, we were facing a grossly oversold market that had broken through yet another critical support level. The next support came in somewhere around 1,375. And if that failed, we could have headed as low as 1,250.
Early weakness dropped the S&P all the way down to 1,378... and then the buyers showed up.
In the final hour, the market erased its losses and rallied hard into the close. By the end of the day, the Dow was up 148 points and the S&P regained the critical 1,405 level, closing at 1,409.
Now, the obvious question is... where do we go from here?
The market has suffered a lot of technical damage. Even if we do get more of a bounce from current levels, it will likely fail, and we'll see a retest of the lows within the next few weeks. If the financial and semiconductor stocks can outperform the market on that retest, then we'll have the first indications that the bottom is finally in.
But I can't recommend shorting stocks at this point. It's a bad idea to short stocks into an oversold market. Yes, it would have worked out well on Tuesday. But oversold markets have a nasty habit of putting on sharp rallies, just like we saw at the end of the day yesterday. And folks who short stocks into weakness often end up covering in a panic when prices rise quickly.
So until we get a washout decline in the overall market (and the financial and semiconductor stocks show some relative strength) or until we get more of an oversold bounce (one that whipsaws the overly aggressive bears), it's best to err on the side of caution and keep trading to a minimum.
Best regards and good trading,
Jeff Clark
