Bottom Guessers Continue To Lose Money As Stocks Continue To Selloff; Charts Are Getting Very UGLY UGLY UGLY (Not A Normal Pullback)

March 5, 2007

Stock market indexes took traders on a wild and crazy wild, on Monday, as stocks gapped lower due to fears out of Asia, the subprime mortgage market, and other various reasons. By the middle of the day stocks managed to make it to the green but were then slammed in the final hour on heavy selling sending the averages right back to where they started.

Some of the reasons given for today’s selloff was the Yen hitting a 3-month high versus the dollar, the ISM service index coming in at 54.3 instead of the expected 57.5, the selloff in Asia, and the worst of it, in my opinion, from the scare in the subprime mortgage industry. Whichever one you want to pick, is the right reason. The fact that the indexes fell on heavy trade is all I need to know. But I know and understand why people need reasons so these are the ones I am giving.

At the close, the SP 400 and 600 led the carnage with 1.8% losses, the NYSE fell 1.3%, the Nasdaq lost 1.2%, the SP 500 lost .9%, and the DJIA full of big-caps held up the best only losing .5%. All indexes ended near their LOD. The worst performing indexes, I track, sadly, lead to the downside. The IBD 100 lost 2.2% and the IBD 85-85 lost 2%. This outperformance on the downside is the opposite of what happens during NORMAL pullbacks. There is nothing normal about this pullback. You don’t believe me? 54 out of 100 stocks in the IBD 100 lost 2% or more!!! And 14 of those lost 5% or more!!!!!! This is no normal pullback. You DO NOT get readings like this during normal pullbacks. Stock indexes are now at four-month lows.

Volume was higher on the NYSE, offering up another day of distribution (not like we need to count them anyways); and the Nasdaq’s volume came in slightly lower but still well above the 50 day volume average. So don’t take comfort that volume was lower on the Nasdaq. The amount of selling overrides that simple fact. Breadth was ugly with decliners beating advancers on both exchanges. Decliners beat advancers by a 4-to-1 margin on the NYSE and by a 14-to-3 margin on the Nasdaq. The selling was broad and strong. Only 4 out of 197 IBD industry groups finished in the green today and there were 66 new highs to 298 new lows. That is a lot of selling.

The big news of the day, imo, was the subprime stocks. Did you see the carnage out there? NEW fell 68% off a criminal probe, and off of that news FMT fell 32% and LEND lost 26%. The Finance-Mortgage & Related group fell 5%, the Building-Residential group fell 4%, and the Finance-Consumer/Commercial Loans group fell 3.7%. These were the clear losers in today’s session. And if anyone wants to see why I don’t try to bottom “guess” or “fish,” just go look at the charts of BZH and MTH.

There was some good news out there: oil fell back to $60 a barrel. That, however, is not seen as a positive by the market, as weak oil shows weak demand from the world and that can only mean a slowing global economy. Take a look at your oil charts to confirm that that game is over. TOT, SSL, and XOM show you what is going on. Nothing but hard and heavy selling. The other good news can be found in the VIX. The VIX jumped another 5% today; It’s a start.

The only index in the green, of significance, this year, is the SP 400 index. The worst index this year has been the Gold index. That index has lost 10% since the beginning of the year. Proving, once again, old leaders are indeed old leaders. Most former leaders do not come back and become the markets next big winners. Gold, this time around, was no exception. Nothing but pain in the gold charts also. It will not be fun for mom and pop who just bought all the gold off the TV and radio infomercials. Once again, the public, is the last to be in the know. The pros are selling on them.

There are a couple internals I would like to go over here. There are now only 66% of all stocks in the market (in TCNet) over the 200 dma. There is no really big deal about the number itself but considering that this comes after the number was at 86% last Monday shows that this market is in serious trouble. For what it is worth, this index gets around the 30-40 area for a good bottom. The percent of stocks over the 40 dma (in TCNet) has crashed to the 24% level. This reading was at 71% before the decline started. This selling has been fast and furious. A normal low happens around the 10-20 area so we are getting near that number.

With the 40 dma number down so low so fast it indicates to me we are getting a bit oversold. So we should expect an oversold bounce. However, since the stocks above the 200 dma are far away from there normal readings at bottoms, I would not expect a long-term rally off any bounce. Like I said, it would only be an oversold rally.

There are a lot of people trying to bottom call and most people are now expecting an oversold bounce. So I am not sure we would get it tomorrow. However, if most people think it will be a significant bottom and not an oversold bounce, then you can expect the indexes to rollover after that bounce happens. I don’t expect a bounce only because everyone is playing for one. Most of the time the crowd is wrong. Even though the crowd, via the total put/call ratio, is bullish at 1.68. Somehow, I don’t think this indicator matters.

Cash is king!!!! I believe it is not the most safe time to short NOW because we have come down so far so fast. But after a low volume rally, if the market is in fact broken, shorting will be the game. It already is paying off quite nicely for those who took my short recommendation. I am not taking my recommendations yet because it goes against my discipline of waiting to confirm we are going into a bear market. If we are, TRUST ME, there will plenty of time to make money shorting stocks. If you shorted AHM or NDE, you are very happy right now.

Aloha and I will see you in the chat room. If you are not part of the gold team, and you have any questions, don’t be shy to leave them below in the comment boxes. ALOHA!!!! Cash is king!!!!!

Bottom Guessers Continue To Lose Money As Stocks Continue To Selloff; Charts Are Getting Very UGLY UGLY UGLY (Not A Normal Pullback)

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