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Market
at the Crossroads - Here's How We're Steering |
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Just
when the bulls were on the verge of taking over again, the bears stepped
in and took a bite out of the rally. Thursday erased about 40% of the market's
rebound move, and Friday wasn't exactly a big help.
What's next?
As always, it depends on your timeframe. We've got some thoughts below
on how to navigate the short-term market. Following that, we've highlighted
some interesting emerging industry trends .
Just to be a
little bit different, we're going to use the Russell 3000 is our market
proxy. It encompasses small caps, and even delves towards the largest of
micro cap stocks.
Between July
15th and July 23rd, the Russell 3000 gained 5.6%. On Thursday, it fell
2.4%. On Friday it made a small gain, but came nowhere near recouping Thursday's
selloff. Nevertheless, the rally we saw jump-started a couple of weeks
ago did do us one favor....it stopped the bleeding from May and June.
The 'ideal'
situation would have been more gains last week, building on the
rally from the week before. Why? Each day of bullishness convinces
more and more buyers to keep flowing back into the market. Of course, that's
not how it panned out.
Instead, we're
now back at an inflection point where the bullish arguments are as valid
as the bearish arguments.
 The
bears
could argue how the Russell 3000 became stochastically overbought on Wednesday.
They could also argue (quite successfully) how the Russell 3000's peak
at 754.69 on Wednesday was a perfect 38.2% retracement of the total pullback
that began in May.
The bulls
could counter with the fact that the losing streak has been broken, as
has a major resistance line. They could also mention the index managed
to close above the short-term 10 and 20 day average lines (the 20 day line
is shown), indicting the upward momentum is still technically in place.
From our point
of view, both sides have decent argument. Just remember though, deciding
not
to choose yet can also be a prudent choice.
At this point,
there's no particular advantage to jumping on the bullish bandwagon - the
time to get on was two weeks ago. On the flipside, Thursday isn't exactly
evidence of further downside....the market was well overheated and needed
to be humbled.
Instead, here's
something of a game plan for the coming week if you're trying to determine
where this chart's actually headed.
First, we're
using Bollinger bands as our guideposts. You can see how throughout
May and June the Russell 3000's lows basically traced the lower band. You
can also see how the index followed the upper band a few weeks before the
big pullback.
What's not
as
evident is how the Bollinger bands are just as apt to be reversal points;
the Russell 3000 almost reached the upper band on the 23rd before retreating.
You'll see much more precise reversals at the Bollinger bands the further
back in time you look.
The point is,
it may not be a bad idea at this point to wait and see what happens when
the Russell 3000 tests one band line or the other. Right now it's squarely
in the middle of the 'zone'; the boundaries are 756 and 713, so it might
take a couple of days to reach either one.
The second
thing we'll be watching for is more bullish in nature. The 38.2% Fibonacci
retracement level sent the index lower on the 23rd, but that doesn't mean
the Russell 3000 inherently has to fall all the way back to 701.96. That
38.2% retracement line - at 753.28 - is only a significant hurdle
to cross. If it is crossed though, it could be a highly-bullish
event.
Notice that
the key retracement line and the upper Bollinger band could both be at
essentially at the same level by the time either are retested.
The best way
to keep tabs on how this is shaping up is to stay tuned to the blog;
it may happen too quickly for us to get a newsletter out about it.
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Drilling
Down Into The Industry Details |
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Earlier this
week in the Micro Cap Press blog we detailed which market
caps, styles (value versus growth), and sectors
were starting to emerge as leaders. Today we'll round out the discussion
by taking a more in-depth look at which industries are ranking at
the top or bottom of the performance tables.
 The
idea is basically the same - long-time laggards that are suddenly new short-term
leaders may be opportunities. While being in the right sector can be a
strong influence on a stock's results, being in the right industry can
be an even stronger influence.
And, it works
the opposite way too - new short-term bearish leaders that were formerly
long-term bullish leaders may be best avoided...or even shorted.
In any case,
the nearby table tells the tale. The primary 'sort' is performance over
the last two weeks. The major comparison we're using is six month results,
though in some cases the six-month results weren't polar opposites with
the two-week numbers. They made the list for other reasons (such as
other timeframe disparities).
Note also that
not every industry necessarily made the list - just the ones putting up
numbers that weren't merely the result of volatility. Industries with results
from last week that were consistent with the two-week total were given
preference, as they're more apt to continue on that path.
We'll also update
this information as needed in the blog
too.
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Updated: 3:10 pm PST (23:10 GMT), November 20, 2008
