Bears in the Driver’s Seat

January 4, 2008

Friday was just about as ugly as it gets. Anyone long on anything pretty much was decimated in their holdings (exaggeration added of course – but not much). When measuring advancers versus decliners, the ratio was 5 to 1 in favor of the decliners. Between the NASDAQ and the NYSE, there were over 1000 stocks that reached new lows – an incredible statistic!

On Thursday, you may recall us giving ample reason for why we remained bullish in the short-term and thought that the market would resume a bullish course. All of that was based on us keeping the status-quo with the current variables/problems affecting the market. What would change the market and its course is a new problem. Well, on Friday we got a something new to worry about – Unemployment. Unemployment rose from 4.7% to 5% in a single month. That is a huge deal, and not something we can dismiss whatsoever. We are lucky in the course of a month if unemployment moves by 1/10 of a percent. In the month of December it moved by 3/10 of a percent. Incredible!

Determining market direction at this point is hardly worth doing, as the market continues to operate in an erratic and unpredictable fashion. Thinking that this is a time to begin shorting the market is not recommended. We are due for some kind of short-term bounce as market conditions are extremely oversold and over extended.

Let’s review the charts…

The NASDAQ had the worst day of all the indexes on Friday selling off almost 100 points to close down 3.7%. The index is in dangerous waters and to begin shorting stocks here would be precarious at this juncture of the sell-off. The market is unlikely to rally to new highs anytime soon, but a ‘dead-cat’ bounce is very likely over the course of the next few days. So if you are going to start shorting securities, it is best if you wait for a more strategic entry point.

The S&P didn’t perform nearly as badly as the NASDAQ, but it was nonetheless a very difficult day for the index, closing down about 2.5%. Capital preservation is a must until this market reveals more of its hand in what direction it is ultimately going to go. At this point, it appears that the market’s outlook is pretty dismal, as problems continue to compile upon problems.