Tuesday, July 31, 2007

A Toothy Bite

We're gonna need a bigger boat.

On Tuesday, a yawning, 62-point outside day engulfed two days of NASDAQ action and part of a third. Volume surged 18% as the Composite led the blue chips 1.4% lower, closing at session lows. Unfortunately, this suggests more downside ahead.

Curiously, internals were bad but hardly catastrophic (see charts). However, New Lows did smother New Highs yet again, 657-132.

In a similar twist, the IBD100 didn't see a selloff as much as a street fight. The index closed down just 0.8%, while stocks that saw Accumulation and Distribution were evenly matched at 25 each. This is unusual, conflicted behavior during a broad market selloff.

The NASDAQ 200-day is just 2.2% lower, and tagging up there would mark an 8.7% pullback. This is light by NASDAQ standards. The RUT is already below its 200-day, the MID is there now, and the SPX, NYSE and WLSH are each less than 1% away. Buyers usually defend these levels, but a third Bear Stearns fund meltdown -- as well as structured credit and currency fiascos -- is unlikely to inspire much confidence on Wednesday.

Below is a 17-month NASDAQ chart that includes the May 2006 correction. As you can see, the current pullback is lightweight by comparison and is even less than the Feb slide. If the 200-day fails, important support lays near the 50% Fibonacci retrace -- a.k.a. the 2007 lows -- about 7.6% lower.

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One of the more troubling developments for stocks on Tuesday were hard selloffs in AAPL, AMZN, IBM and ORCL. All have been leadership stocks for months, and tech is on an upswing. It's a bad sign when stocks with solid earnings within a leading sector are hit by heavy selling on the same day.

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The VIX is offering little comfort, and continues to be a disturbing chart for equities. After a 5-month, 160% rally in the face of rising stocks, the VIX is once more poised to hit new highs. There's ample fear, but so far there's been little panic. The VIX is up 60% in two weeks, while the SPX is down just 6.4%.

What is the market so afraid of?

Options expert and CNBC contributor Jim Kingsland makes a strong case that carry trade woes intertwined with US credit pathologies is the invisible chupacabra the market fears. If Jim is right -- and this area is his strong suit -- the worst days are still ahead for the stock market.

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Over the past two days, I've noticed a surprising number of analysts say, "financials are starting to look interesting here." Oh, really? After today, XLF is down just 13% from its high, a 50-day Death Cross looms, and there's no evidence that the coast is clear for financial stocks. Be late to this party. You'll have a much better time.

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The market continues to offer few signs that it's near a bottom, even as tricky storm clouds seem to be gathering. Be patient.

And keep an eye on the VIX.

Wednesday is going to be interesting, to say the least.




Bill said...

Um, someone else mentioned the carry trade as the proximate cause for the selloff, and he mentioned it late last week. See paragraph two of my post from Friday.



dk said...

Sorry that I missed that, Bill. Good post.