Bears Refuse to Loosen Its Grip on Stocks

January 3, 2008

Yet another day where we open up somewhat decent and then give back all those gains to the market. The bears know that there is a lot of underlying problems with the economy, and with every rally in the market, they take as an opportunity to short even more. Where this becomes a problem is when their capital is exhausted and the bulls step in and rally the markets creating a ‘short-squeeze’ (a term used for when masses of short sellers are all covering their positions all at once which creates limited supply and a quick upswing in price). It should be remembered that the negatives that are out there in the market currently, are not ‘new’ by any means. In fact the news that the market continues to sell-off on this past week or so has all been well-known. For instance, rising oil – not surprising; subprime – been fighting this issue for the past year; unrest in the Middle East – been a problem for years now; Inflation – a concern but one that has yet to get out of hand despite rising oil prices. The list goes on and on.

Now you might recall that about a month ago we were bearish on the market, however we reversed direction on a short-term basis (a recession may still yet come in the long-term) because it doesn’t appear that the bulls are going to give up without a fight. Meaning, the market has shown that it has been able to price in much of the problems we are currently facing with the facts that we currently know. Therefore, we believe it will be difficult for the market to continue in a downward pattern without some kind of new ground-breaking development. We also have the Fed that continues to try and get ahead of the credit problems plaguing the financial sector. So more rate cuts can be expected – which can only help us out.

There should be some kind of rally in the next few days to alleviate the selling pressure over the course of the past five trading days.

Let’s review the charts…

NASDAQ closed slightly down on the day after a late day sell-off. The index spent most of its day fighting to stay in positive territory but succumbed to the bears at the end.

The S&P closed flat on the day also, after spending most of its time in positive territory. It held support quite well, but we need a rally at current levels to keep up from breaking support levels. If we break the December low, then it’s a good chance we will retest the November lows.

Big jobs report coming out tomorrow morning that will have a major influence on the overall market. Stay-Tuned!