Another Intraday Rally Turns Into Losses; Very Choppy Market Requires Patience

June 26, 2007

Weak consumer confidence numbers and even more bad news from the housing market at first didn’t seem to phase the market too much. But as the day went on, more subprime fears from BSC caused stocks to reverse an intraday rally, for the second day in a row, despite oil falling to $67.77..

The SP 600 led the way lower with a .5% loss, the NYSE and the SP 500 fell .3%, and the DJIA and Nasdaq fell .1%. The Nasdaq lost ground for the third day in a row. Leading stocks kept up with the broader market as the IBD 100 fell .5%. There was nothing real serious in this index, but some leading stocks are showing some cracks.

The only good news, behind the selling, was that volume was lower on the NYSE by about 1% and was pretty much dead even on the Nasdaq (IBD has it slightly higher and TCNet has it slightly lower). Declining stocks beat advancing stocks by about a 2-to-1 margin on both indexes.

The most eye-popping internal of today had to be the VIX rallying 13% to a four-month high of 18.89. This is excellent as it means that volatility is rising, and if and when the selling stops and the market starts rallying again, stocks are going to produce higher returns. Now, the best news would be bad news for most of you, even though I have warned you that you shouldn’t be fully on margin at this time, as I would love to see the market fall 5-10% so that this VIX can get over the 25 level. That will guarantee that when the market makes a meaningful low and gets some follow-through that I will catch some big winners.

As of now, you have to trust me, when I say it is not smart to find big winners here. The market is definitely seeing a change in trend. And even though it doesn’t mean I am bearish it doesn’t mean I am super bullish here. The market appears to be going through a choppy phase where some longs work, some shorts work, some longs don’t work, and some shorts don’t work. This is not the best market for newbies to be involved in. But a selloff of 10% and a VIX near 25 and then you can start getting excited again. But remember there is no guarantee how long a selloff can last. It could be two months or two years. I know that sounds like a long time, but you should do a review of how stocks performed from 2003-2004. Trust me, it was worth the wait. And if you know how to short, this high VIX, with the market in a clear distributing downtrend, can make you a lot of money on the short side. We still are not there yet.

The reasons why we could rally here are the high NYSE short-interest ratio, the indexes are only 3% away from their recent highs, the lack of euphoria, the high put/call ratio, and the constant negative media. The reasons we could fall here are the overbought conditions, the VIX hitting new highs while stock indexes are not hitting new lows, new lows are leading new highs by a 179 to 103 total, the SOX fully reversed its breakout (but is still above its 50 dma), and defensive stocks are starting to rally.

On that note, stocks in the Medical, Food, Tobacco, Textile, Consumer Products, and Commercial Services got a strong bid today. This while the old leading Oil stocks got hit. This is looking like the wrong kind of rotation. Since some Medical stocks have already been doing well, it might be safe to say that those stocks doing well could be a tip off of a rotation into defensive issues.

Take that along with some of the current leading stocks showing some weakness and our guard has to be up now. Even though it might not turn into a full fledge bear, a choppy market can be just as dangerous as traders overtrade and have many small cuts do serious damage when the winners don’t turn make up for the losses. So be small in your trades right here in this slow summer environment.

There are three days left in the second quarter and I am sure there might be some window dressing. That along with the FOMC meeting tomorrow with a decision on rates on Thursday is definitely going to be the focus of most traders. It won’t be by me though. I could care less. I just care about the actual price and volume action of my stocks, stocks on my scans, and the market.

Don’t be bullish or bearish at this point. Keep a neutral bias, hold your winners, cut your laggards, and keep new buys small. Aloha and I will see you in the chat room!