Market Risk Is on the Rise

03/30/2009 12:57 pm EST


Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of, says the short-term risk in the broad markets is rising after its recent rally off the March lows. 

Short-term market risk is rising as bulls looking for a move even higher get greedy. The three-week advance off the March low has been impressive, and investors who have profited from the move should protect themselves. The Nasdaq Composite index was up 24% before selling on Friday. Returns like that over short periods increase the downside risk. Now is a good time to adjust stops and protect your gains.

We finished last week with the third consecutive week of positive returns, and the winner for the week was again financials as broker/dealer stocks set the pace. Industrials stepped up after lagging the last two weeks, gaining 10%. Consumer discretionary and basic materials showed solid returns as well for the week. The Standard & Poor’s 500 index overall gained 6.1%, finishing a nice three-week move back to the October lows. This level is likely to prove to be resistance for the broad market.

The Nasdaq was higher by 6%, with technology leading the up side. Semiconductors gained more than 10% on the week. That index broke through resistance at 231 and continues in an uptrend off the March 9th low. 

We currently have a “V” bottom forming in the S&P 500, as shown on the chart below (prepared using TradeStation). This is generally known as a reversal pattern in technical analysis. The bulls are pointing to it as the end of the bear market and declaring more upside on the way. While that may prove to be true, I am still very cautious.

The economic data is improving in baby steps, but GDP estimates for the first quarter are  -6%. The second-quarter estimates are -3%. Yes, that is improvement, but growth isn’t projected to return until the fourth quarter at the earliest. It is, after all, about the economy. First-quarter earnings announcements start over the next couple of weeks and they are not likely to impress.

Some sectors are showing signs of fatigue as a result of the solid move higher. There are four sectors to watch this week—homebuilders, real estate, financials, and energy. Each has moved off its lows and is showing signs of topping. The result could be a pullback to the respective support levels (see table below) or they could lead to a test of the previous lows.

There are other sectors coming to life and should be watched for a continuation of the upside trend. Industrials, basic materials, and transportation all showed solid moves to the up side last week. The table below (which is updated nightly on has been updated to reflect what to watch during this week of trading.

Overall, the short-term risk of the market is high relative to the move off the March low. The ten-day moving average is the first support level for the broad market. Looking at the above chart of the S&P 500 index, the green trend line is the ten-day moving average and support. 778 would be the next level of support. Watch for indications of a test of the previous lows. The market has been moving higher on hope rather than improvement in fundamental data, and this is another reason to be cautious.

Jim Farrish, founder and editor of Melbourne, Florida-based, writes regularly about sectors and speaks widely about investing and money management.

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