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From The Trading Turret
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From: R.A. Christy
Editor, ‘From the
Trading Turret’
President/CEO, Christy
Investment Group
http://www.christyinvestments.com
Date: February 27, 2007
Current Field Position:
OFFENSE
Bullish Percent NYSE:
Xs @ 74
Bullish Percent OTC: Xs
@ 58
Bullish Percent Option:
Xs @ 78
This week’s
comment …
In last week's piece, I
mentioned that there were several things in place that could result in a
pretty good sized correction. Without beating a dead horse, the market
was overdue for a correction - plain and simple. We have gone more than
900 days without a 10% correction. A number of analysts crawled out from
their hiding places and opined that the market was stretched to the
upside. Now what exactly led them to that obvious conclusion? I missed
my calling. I can state the obvious.
The analogy that I have
used for years is that the economy and the markets are like a rubber
band. They bend, stretch and rarely break. Nine hundred days is a pretty
big stretch and like a rubber band, the contraction back to normal can
be pretty brutal.
I also said that the
market was overbought and losing momentum. Our Bullish Percent numbers
have shown us this for some time and continue to do so.
I also touched on
complacency. As everyone who reads this diatribe knows, I can’t stand
the talking heads. Their “everything is always roses” reporting is more
of a disservice than anything substantive. What I call complacency is a
lack of volatility, overly optimistic investment sentiment and the near
record lows in the spreads between high yield bonds and US Treasuries.
OK – the market got
whacked. Why – let’s take a look.
China. Stock
markets around the globe suffered their steepest one-day declines since
2002. The carnage started overnight in China as stocks dropped 9% on
concerns that the Chinese government might clamp down on speculation.
Greenspan. Former Fed Chairman, Alan Greenspan, said in a speech that
slowing growth in corporate profit margins was a sign that the current
economic expansion might be winding down. He also expressed concern
about the current turmoil in the “subprime” mortgage market. Greenspan
said "When you get this far away from a recession invariably forces
build up for the next recession, and indeed we are beginning to see that
sign."
News. The main news event of the day was that durable goods declined 7.8%.
These three items
definitely contributed to the slump, but the seeds for a decline have
long been in place. All we needed was for someone to light the fuse.
Smart money has been cautious for some time.
For example, put/call
ratios are usually used as a contrarian signal. When too many investors
load up on puts the market usually rises. However, OEX options are used
by many smart money investors and recently the 15-day OEX put/call ratio
spiked to its highest level since 1999, a sign that smart money
investors were growing increasingly concerned with the current market
environment.
The selling pressure
yesterday was intense as every one of the Dow Jones Industrial stocks
were down, all but two of the S&P 500 stocks were lower, down volume was
100 times up volume on the NYSE, and it was a record volume day across
all U.S. exchanges. The S&P 500 declined 3.3%, the Dow Jones Industrial
Average 3.3%, and the Nasdaq Composite sank 3.3%. The declines wiped out
the year-to-date gains in the three major indices. The losses were even
steeper in emerging markets with the Mexican Bolsa down 5.8% and the
Brazilian Bovespa down 6.6%. European markets weren't spared either with
the German DAX down 2.9%, the French CAC-40 down 3.0%, and the UK FTSE
100 lower by 2.3%.
The question that
investors and analysts are now asking is "Will the slide continue or was
it a one day wonder?" The technical damage done from a decline like this
is not usually repaired overnight. However, the market is now extremely
oversold on a short-term basis, so we should see some stabilization and
a rebound attempt. As we write this update on Wednesday morning the S&P
500 and Dow Jones Industrial futures are trading higher, so a rebound
attempt is likely. However, all major Asian and European markets
continued their slide overnight with the exception of China, which
rebounded 3.5%. The next several trading days are likely to be very
volatile and yesterday's lows are important levels to key on.
In recent history,
large declines like this have proven more often than not to be good
buying opportunities. In most cases we have seen a continued sell off
the next morning with an intraday reversal to the upside later in the
day. If that pattern repeats in could prove to be bullish. If the market
holds above yesterday's lows then there is a good possibility that the
decline was a one-day event. However, if yesterday's lows are violated
over the coming days and not quickly recaptured, it would indicate that
a deeper intermediate-term correction has begun.
In addition to
yesterday's lows, key support areas consist of 12,000 on the Dow Jones
Industrial Average and 1375 on the S&P 500.
Keep an eye on the
stops and caution is the keyword over the next few days. Trust your
instincts and the research. The only opinion that matters is yours.
That’s about it. Have a
great week!!
RA Christy
P.S. Please fee free to forward this to your peers, friends and
associates you think would benefit from its contents. They will thank
you for it - and so will I!
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R.A. Christy is a
professional stock trader, money manager and author. Mr. Christy is the
President CEO of Christy Investment Group, Ltd., a registered investment
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