Sell the Bounce

Yesterday saw a short term selling climax on strong volume as market participants disgorged their wishful thinking over the progress of the US economy, political system and corporate profits.

Markets have been down for 8 straight days, the longest such run since October 2008, according to the WSJ. That run, in the midst of the TARP failure and banking crisis, led to a healthy oversold bounce (7800-9200).

However, those were different circumstances than now. It was 12 months after an all time peak had been hit, and 9 months into a recession. Markets in October 2008 were very deeply oversold, and so a bounce for a month and a half was not a huge surprise. Following the bounce, they then resumed their historic collapse.

Lacking the sort of conditions that led to that October 2008 rally, I suspect this will be a brief bottom, followed by a resumption of selling. This is only my suspicion (My managed accounts are running about 50% cash and bonds, the rest reasonably valued ETFs and funds). Every investor’s favorite months — September and October — present the opportunity for the sorts of convulsions that make market for good historical reading.

We also see the Transports rolling over, breaking 5000 for the first time since March. The 200 day SMA is at 4400, and that is a fair target. Dow Theorists will tell you that Trannies leading Industrials down never a good sign for the overall market.

Now for the good news: The drop yesterday has generated significant oversold readings. Dick Arms noted that his eponymously named Index suggests some fear is coming into trading. That — and the S&P approaching the 1250 level (prior support) is likely to provide a temporary bounce.

I would suggest to nimble traders that they closely watch the quality of any rally after the slide of the past 8 days. From that, you must decide whether to jump back into the fray, or use the opportunity to lighten up your equity exposure.

You can guess what I am going to be doing . . .

click for larger chart

Chart via Dow Jones Market Data Center

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