Prescient Bull Says "Sell"

05/27/2010 1:30 pm EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, who called the bear market in early 2008 and got back into stocks last April, now tells subscribers to sell stocks and go into cash.

The magnitude of the [recent] decline was enough to cause an ample amount of investor anxiety, but the extreme volatility that accompanied it exacerbated the fear level. The fear level reached the panic stage after the [Dow Jones Industrial Average] plunged almost 1,000 points in a matter of minutes on Thursday, [May 6th].

There is no question, however, that investor complacency has been jolted as market volatility, virtually absent over the past several months has returned with a vengeance. The [recent] sell-off also managed to wipe-out all the gains made in 2010.

We firmly believe and our track record proves that there are times you should not have any exposure to the stock market.

For example, we issued a Sell signal to all of our subscribers to move into a 100% cash position on January 17th, 2008. The reason we took this action was twofold. There was a breakdown in the relative strength stocks and ETFs that were leading the market. Second, our real money portfolios violated their predetermined stop-loss points.

As you know, over the ensuing months the Standard & Poor’s 500 fell nearly 50%, with many buy-and-hold investors holding losses of more than 50% of their portfolios. The last time we [had] moved to an all-cash position was back in 2002 when the S&P 500 fell 22%.

We now advise subscribers to sell all stocks moving into a 100% cash position.

We sold because our models turned negative for the first time since last July. There has also been a substantial breakdown in the market leaders, which are by definition the stocks in the forefront of our relative strength ratings.

Stocks took a major hit [last week,] with all the key averages losing between 3.5% to 5%. In the process the Nasdaq Composite, Dow, and S&P 500 have taken out their respective 200-day moving averages. 

For the Dow and S&P 500, it was the first drop below the 200-day line since July of last year. For the Nasdaq you have to go back to last May. Declining issues held a ten-to-one advantage on the NYSE and 11-to-one on the Nasdaq.

Support seems to come into play, as the various averages approached their intraday lows of the flash crash, which took place on May 6th. The first probe towards the lows came around 1:00 PM EDT. By 2:54 the Dow had rallied 160 points only to give it all back and then some by the close.  However, all of the key indices, with the exception of the Dow Jones Transportation Average, are still narrowly above their May 6th “flash crash” lows, where support seems to be clearly in evidence.

But until volatility settles down in a big way, we would rather be out than in. 

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