Thursday, August 28, 2008

Market Update: No reason for short term bets

On August 20th, we noticed that support had been broken and the nice run from the July 15th capitulation was nearing an end. We recommended to sell into strength at that time, and the time is now.

Sure this week has been low volume with the end of summer, but the technical analysis of the market is not reassuring. The future is impossible to predict and now is a good time for risk management and hedging all your long positions with corresponding shorts.

Oil price has been the wild card and now we are seeing renewed strength in that sector with the narrative assigning weather considerations to the recent rise in the barrel price of oil.

The sentiment indicator we are looking at in the above figure is the "% of NYSE stocks above their 50-day moving average." While this is not as bearish as we had seen in October, the pattern certainly is not contradicting the bearishness of the price movement in the first figure.

We have had a large number of stocks cross above their 50-day MA in the last 5 weeks and that should act as a short term ceiling to price movement. Be careful establishing any new long positions in this environment.

Having said that, the regional banks (KRE) have been pummeled and will likely be the first to emerge from the financial doldrums when that time comes. Many of these companies have solid balance sheets and their retail businesses should continue to to do well as the economy chugs along. The question remains how long it will take, but KRE basket of regional bank stocks boasts a 5.2% dividend, which would pay one to wait while taking little risk for the long term.

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