A Bounce and Then a Sell Off

05/29/2008 12:00 am EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, editor of VRTrader.com, says the markets are oversold in the short term, but once they rebound a bit there could be further weakness going in to the summer.

The bulls got things off to a nice start for the week as the market bounced after last week's ugly selloff. Volume was essentially flat compared to Friday and breadth was positive. The buying interest was underwhelming once again as the burden of proof clearly remains on the bulls.

Last week I wrote more than once about commodities and oil specifically being a bubble. Now, the legendary investor George Soros is singing the same tune. "Speculation...is increasingly affecting the price. The price has this parabolic shape which is characteristic of bubbles." He continues, "The rise in the price of oil and food is going to weigh and aggravate the recession." Sounds like inflation and recession. An ideal time to short stocks, short bonds, and be long gold, just as our model says.

The markets are a bit oversold. On Friday morning I wrote: "It appears there is still a chance the Standard & Poor’s 500 could work lower (1370?) before the advent of any 'summer rally.'" We touched 1373.70 intraday Friday, and now we have to see if that holds on a closing basis.
One encouraging aspect, however, was the strength in technology stocks as they continue in their leadership role. Apple was very strong, helped by news it is taking its iPhone to Nordic and Baltic markets after signing an agreement with a regional telecom operator.

There is no doubt as to which index is trying to lead right now. While the Dow Jones Industrial Average and S&P 500 took out their May 9th lows, the Nasdaq Composite index held firm and by far had the most impressive performance. What remains to be seen is if the selling in the financial stocks spreads to the Nasdaq to send it reeling as well.

The fact that the Dow and S&P broke their short-term lows is in and of itself not something that will set off alarms; it does signify the beginning of a corrective phase that could gather steam as we expect. The key is the Nasdaq. If it cracks, there does not look to be any other index that will step up and fill the breach.

I remain on my Timer Digest “Sell” signal as cyclical forces overall remain negative, but there are going to be bounces along the way. There is nothing to say markets couldn't stage another rally in June. Remember the traditional “summer rally”?

Well, perverse as it may sound, we sometimes experience the “summer rally” into “Summer Solstice,” which officially marks the beginning of summer—after which we turn south. Mark June 20th on your calendars.

Subscribe to VRTrader.com here…

Related Articles on MARKETS