This Indicator Can Make You a Fortune... Or Save You One
By Jeff Clark
June 10, 2008
As I watched the market trade last Wednesday, I heard a strange sound from my computer screen: "Nooooooooooo!"
The Dow Jones Industrial Average was up over 100 points, and I was considering buying a few stocks. But my canary was begging me not to do it.
Sure enough, the canary was right. The market rolled over and actually closed down 12 points by the end of the day. My canary saved me.
On Thursday, the market opened up 100 points and increased the gain to 200 points by the end of the day. Again, I was tempted to buy. Again, my canary was screaming, "Nooooooooooo!"
My canary was right. On Friday, the stock market fell 400 points. Anyone who bought on Thursday was sitting on losses the next day.
The "canary," of course, is Merrill Lynch (MER). I've often referred to shares of MER as the proverbial canary in the coal mine. The performance of MER shares is a strong indicator of the health of the stock market's short-term trend.
If the market is rallying but MER shares are falling behind, then the rally is likely to reverse. On the other hand, if the market is falling but MER is gaining, then the decline will probably be short-lived.
Traders can use the clues from the canary to make short-term bets on market direction.
For example, last Tuesday, I told S&A Short Report subscribers to buy index puts betting the market was headed lower. Thursday's 200-point rally had us underwater on this trade, and I was tempted to recommend closing the position for a small loss. But the canary told me not to do it.
Despite the strong rally in the broad stock market, Merrill Lynch was down sharply on the day...
The stronger the market rallied, the weaker MER traded. So we stuck with the trade and were able to profit as the Dow dropped 400 points on Friday.
Subscribers closed out half the position yesterday for an 80% gain in less than one week. We'll hold the rest of the puts a little while longer. After all, the canary still doesn't look too good.
So the next time you're tempted to make a short-term bet on the market, take a look at how MER is acting. You can learn a lot from a canary.
Best regards and good trading,
Jeff Clark
