Industrials have been my favorite sector for the fourth quarter of this year; my latest recommendati...
U.S. stocks break out of their trading range--unfortunately to the downside
11/21/2011 6:30 pm EST
What? Oh, they’ve broken out of the range between 1215 and 1295 on the Standard & Poor’s 500 stock index to the downside?
Well, then Boo!
If you were hoping that the big October move to the upside was a true rally that might be about to end the bear market that set in this summer, then the bad news here is that with the break down through 1215 to 1193 at the close in New York the October move was clearly a bounce and we’re still in the paws of the bear.
That doesn’t mean that we can’t get another bounce. In fact I think the odds are pretty good that we will. And relatively soon.
There’s very solid support at 1183 (a 50% retracement of the October move, any good technical analyst will tell you—as they have told me), and then again at 1179 and 1176. The market is oversold. Today’s bad news is so bad that it could wash out a lot of the remaining borderline bulls. And we could get a bounce from here.
But the key take home lesson from today—the lesson to remember if we do get a bounce—is that even if the bounce is as substantial as October’s it is still just a bounce in a market that is in a downward trend.
In other words, enjoy the bounces when they come. Sell into them if you’re positioned to do so. (Which means you had to have the courage to buy stuff near what you thought might be a bottom. Tough call on that since this market is very news driven and it’s hard to call a turn in the news flow.) And don’t get caught up in the enthusiasm as stocks head back upwards in a bounce. That isn’t the time to be buying more.
My guess is that we’ve got another six months or so of this volatile but downward trend to live through. Emerging market stocks will, on the evidence of October, outperform their developed market peers when the level of fear has moved down from DEFCON 1. (For more on that see my post of Friday http://jubakpicks.com/2011/11/18/beyond-the-volatility-china-and-brazil-have-started-to-outperform/ ) When the market is in panic mode, as it is today, however, everything will sell off.
If you’re trying to build long-term positions in preparation for some turn in mid 2012, you might try adding them at bottoms (if you can find them) or trading the volatility by buying at a bottom, selling half of what you bought at the top, and then rebuying what you sold plus an equal amount of new shares at the bottom (even harder.) Or you can just use good old dollar cost averaging or sit in cash until we’re better able to see a turn.
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