Welcome to the Second Half!

NOTE:  This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 7/1/2008 after the market close

This is posted here not as investing advice, but
rather as an example of a trading call for potential subscribers.


What now?

That’s the questions investors are asking themselves after the worst June in 70 years, and the worst first half since 1970.

Here is our market overview: The Dow is now off nearly 2,000 points — almost 10% since in less than two months. Year-to-date, the Dow Industrials have lost move than 14%. The Nasdaq gave up 8% over the past month, and has fallen 13% since January 1. Since mid-May, the S&P500 is off 6%, while losing 12.5% YTD.

This has created a deeply oversold condition. As of the market close on July 1, we are at levels that typically suggest a move to the upside is in the offing. However, given the ongoing decay in the fundamentals — the economy is actually getting worse, not better — we would look at any bounce as just that: An oversold counter-trend rally that should be sold into, not chased upwards.

Let’s look at the charts for the Dow. The first chart below is suggesting that we are looking at a potential reprieve — at least for a short while.

Dow Industrials, 6 Month ChartDow_6_months

Candlesticks 101: Above I have circled what the "Hammer Bottoms".  These are days that trades deeply down, accompanied by an intraday reversal, closing at or near the highs of the session. We not only saw that today (July 1 2008), but we saw similar moves during recent lows in January and then in March of this year.   

Note that the longer term chart below shows the MACD reversal corresponding with temporary — not permanent — tradeable lows. In the battle between Bulls and Bears, the Bulls have been losing. Now is the Bulls moment to shine — at least for a few days or so.

Dow Industrials, 18 Month ChartDjia_18_mos

Why is this so? The Hammers circled above are usually viewed as bullish, as they suggest that sellers may have
(temporarily) exhausted themselves. This presents buyers with an opportunity to reverse their losing streak, at least for a while.

Why only a while?

To start with, we have a relatively high degree of complacency. This VIX reading — the VIX is known as the Fear Index — from last week has barely budged!  As thge chart below shows, we are no where near the levels of fear that have accompanied lasting lows. I would have thought the most recent drop might have frightened investors just a tad; Instead, the bottom callers were out in full force. There is still a whole lot more greed then fear.

VIX Chart, 1 year


The Bottom Line:  The above is why we look as
this bounce as just that — not a lasting change in markets or the
economy. It is as an opportunity to exit whatever stocks you
want or need to get rid of. Anything you are uncertain about should
have a trailing stop placed under it.

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  1. The Big Picture commented on Jul 9

    Last Week’s Trading Call

    Last week’s trading call, unedited, typos and all, is now posted: Welcome to the Second Half! Here’s the money quote: However, given the ongoing decay in the fundamentals — the economy is actually getting worse, not better — we would look at any bou…

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