Up, Down, and Up Again

December 18, 2007

There you have it: clear indecisiveness on the part of investors in determining market direction. Without a doubt the market is in oversold conditions and we should have some positive days ahead of us with that being the case. However, a solid bounce over the course of the next couple of days, will, by no means, indicate that the market is back on track. These so called “Dead-Cat” bounces are very typical in a market that has sold off as much as we have since last Tuesday.

Without a doubt the “buy-the-dip” mentality that most investors seem to have will eventually run its course. Each drop in the markets attracts buyers believing that a near-term rebound is right around the corner, and for a long time they have been correct. For all we know they could be again correct in this most recent sell-off. However, it should be noted that the more recent sell-offs have been met with weaker and weaker bounces/recoveries. Not a good sign if you are a bull, and it is something that we call a bearish divergence (which is where the price continues to go up, but an indicator show a movement in the opposite direction which lead investors to believe that buying is becoming exhausted).

It is important to keep as much capital as possible in this type of trading environment. We will still provide stock recommendations both to the long side and short side, but it will be given in a very conservative manner, until we believe the market is ready to move in one direction or the other.

With the bounce, the market is still oversold, as the rally today was not nearly enough to pull us out of these oversold positions.

Let’s review the charts…

NASDAQ had a seesaw type of day with the index opening strong and then selling off, but then rallying into the close. This is a clear sign that the bulls and bears are fighting hard for market position and who is to ultimately control the direction of the markets.

The S&P also had a solid day and even though it traded both in the positive and negative at various points of the day, but it was less volatile then its counterpart. Markets are likely to bounce over the course of the next couple of days so expect buyers at some point in this selloff to take advantage of the perceived discounted stock prices.