The Market Isn’t Out of the Woods Yet

07/30/2007 12:00 am EST

Focus:

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, editor of VRTrader.com, says the intensity of last week's selloff may continue to push the market lower in the weeks ahead before it finds a bottom.

As I have been warning for [some time], negative divergences in the financials along with deteriorating breadth painted a worrisome picture for the bulls. Last week things began to unravel.

Subprime concerns surfaced again after Countrywide Financial (NYSE: CFC) badly missed expectations and slashed its full-year guidance as delinquencies rose across all mortgage product categories. That put traders in a sour mood early and more than offset [other] solid earnings reports. The bulls tried to mount a charge, but their efforts were futile as sellers overwhelmed buyers and the rout was on.

I remain on my "Sell" signal even though I've traded in and out of short index positions since that time. I do not believe we're out of the woods yet with regard to the potential for a greater short-term decline. There is still risk [that the Dow Jones Industrial Average will fall] to 13,250 and even 12,795 should things get nasty in the weeks ahead. (The Dow closed at 13,265 Friday-Editor.)

Though I was probably the first bear out there when I flashed my June 6 "Sell" signal and have stayed a steady course since that time, I too was surprised by the intensity of [last week's] sell-off. Volume was extraordinarily heavy to the downside and has been increasing to the downside these past several sessions. Breadth was nearly ten to one to the negative [on Thursday].

Is this move a shakeout or an indication of an outright trend reversal? Downside volume and breadth have been horrendously negative, which is usually not the case in a healthy uptrend. We remain on watch for a new advance unfolding later this year, but we are also listening to the market that is saying that there may be more to this decline than meets the eye.

Under my projected 13,170-13,250 area, I've told you a move to 12,700 is likely next. When we get there we should have a clearer notion of whether the markets are merely experiencing a very nasty correction or indeed are pushing a bear market forward. I currently lean away from the bear market scenario, but, as always, I take it a day at a time.

The market is quite oversold and I suspect a trading bottom has already occurred. Cyclically, we're still in a negative time. Perhaps it is from last week's lows that traders will begin to mount the expected end of the month/first of the month buying.

The Sell signal remains in effect.

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