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July 7, 2008

Ugly Stick

This market is getting beaten with the ugly stick. So is my mood. For someone who has been stalking this bear for a couple years, I feel like I should be performing much better. I'm snagging a few bucks here and there on brief trades but would have done much better just having a modest short position and holding. Such was my strategy during the first down leg , but for some reason I just haven't been able to get myself to commit to holding a position. So it goes.

Today's action was quite frightening. Despite oil plunging five bucks in the early going, equities couldn't muster a rally. When oil started creeping higher, stocks took a beating and only a late-day rally made the final score look decent. Underneath the surface, however, the action seemed quite ugly.

Unless We Crash
The following paragraphs contain various postulations of where we go from here. You should mentally add "unless we crash" to the end of each of them because I think a rapid tumble into oblivion is as much a possibility as its been in say.. oh.. about 21 years.

stock chart

If the market were in the vicinity of a significant bounce, I would tend to have expected it before we got a close below the March low. It's more likely now that we tumble a bit more so that any correcting rally provides a back test of that level. With the SPX so stretched below its 65DMA, I still expect a bounce to occur soon, timewise, but perhaps we see nasty 3-5% dive just prior.

stock chart

The only group more dependent on consumer spending than retail stores are the companies that provide all the gadgets that people buy. Tech usually tanks ahead of the retail sector, but it ain't working out that way. Seems folks still have a Y2K hangover and believe tech will save them. Nope. Sorry. It won't. In fact, post-bounce I believe tech will outperform the general market in another way: to the downside.

stock chart

Several of my posts back in May measured this triangle to a target of 50 on the BKX. Almost there! Perhaps our bounce comes once the target is tagged.

silver chart

One of these days traders will get faked out by one of these price breaks only to see silver reverse suddenly and surge higher. I'm standing pat with my current position and will add to it if we {shudder} approach the $16.50 support area again.

Natural gas got tagged for almost 5% today. Why is that important? Because NG has been the strongest component of the energy complex in recent months. It was up day after day, even when crude had a rare down day. Natural gas prices have nearly tripled since September whereas crude oil sports a mere double. I have been watching NG closely for signs of a break as a potential signal for a break in energy as a group. Add the fact that energy-related equities have started to crack, and I think we have our canary in the coal mine (appropriate use of a metaphor, don't you think?).

So, put all the pieces together and we get the following: energy shows perhaps one more gasp to the upside. This last gasp knocks equities sensless and we tank into a near-term bottom. The BKX hits 50, and the SPX has a 4% down day. Oil then starts to tank, instigating our long-awaited bear rally.

Unless we crash.


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