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Caution is in Order as Bears Take Control

03/15/2007 12:00 am EST


Mark Leibovit

Chief Market Strategist,

Mark Leibovit, chief market strategist for, says his proprietary volume reversal analysis points to a rocky period ahead for stocks.

Talk about a "Turnaround Tuesday!"

Though we were thinking that an option squeeze (calls) might lay ahead with Friday's quadruple options expiration, it was also clear we were quite overbought.

The market broke down late morning and accelerated downward into a full-blown meltdown by the close. Volume was up across the board and breadth was horrible.  Concerns over the sub-prime mortgage debacle and subsequent mortgage delinquencies rattled the bulls as the bears once again asserted complete control.

I [had said Tuesday] morning: "Stepping back, I would recommend some caution here on the long side and should volume start to press the down side, establishing short positions once again may be prudent."

Indeed, we sold our long positions [Diamond Trust, representing the Dow Jones Industrial Average, and the SPDRs, which track the Standard & Poor's 500] at the opening and later established short positions. Negative volume reversals were formed, so the ship is again sinking and we should see new lows! We can expect more weakness over the short term as we see if the lows set on March 5th hold, or if they come out. In either case, extreme caution is warranted on the long side.

But, how low is low? As we've previously noted, downside potential during this negative "cyclical" period carries back to the May 2006 highs, i.e., 11,670 in the Dow Industrials, 8651.74 in the NYSE index, and 1326.53 [in the S&P 500]. There is no guarantee this has to occur over the next few days or weeks, but it certainly may.

The bigger question is whether the market has signaled the beginning of a bear market and we're all groping around looking to buy when we should be getting short. A bear market has not been confirmed and it will take several months to know for sure. If, indeed, we've entered the first stage of a bear market (remember, years ending in "7" have had some notorious corrections), there is time for this to occur. We had warned you that the period stretching into tax time (April 15) could be unnerving as investors unload positions to raise cash, using the China stock market correction and sub-prime mortgage stories as an excuse.

Do not listen to these overpaid know-nothings at the brokerage houses telling you that stocks are a "good value" here. Much damage is being done technically and the fundamentalists are always last to the party as they do their analysis using outdated information and usually incorrect forward projections. We will tell you when the selling has abated and when it is safe to re-enter the markets, because we use the market itself as our guide, not some arcane, obtuse measurements of "value."

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