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MARKET ANALYSIS

For investors in search of reasons to book profits and other less seemly activities, the last three sessions have offered bearish catalysts in spades built around a Full House. As of Thursday’s close, the NASDAQ ($COMPQ) and S&P500 ($SPX) are off a whooping -3.39% to -3.82% and testing the conviction of bulls everywhere.

Down less than four percent actually doesn’t sound too terrible in the scheme of things. That’s particularly true in light of scoring all-time-highs just more than a week ago and how far the market has come in just 2007 alone. But that bit of relief, if we can really appreciate it as such, was realistically made possible by a handful of BTE’s such as Amazon (AMZN), Baidu (BIDU), Apple (AAPL) and Merck (MRK). Bottom line, if you weren’t in those stocks already, it likely didn’t matter. Unfortunately, elsewhere and nearly everywhere, technical conditions have been, on average, much less kind. And until negative crowd psychology opts out of seeking, promoting and generally imagining the worst for the market, conditions will remain tenuous and volatile at best.

Spearheading the case for the bears and bulls wanting to help, the usual suspects of a deteriorating housing and subprime woes ramped up their efforts at making PIMCO’s Bill Gross and his 10% corrective market call, a fast reality. Two weaker than expected reports on housing and further dreadful-sounding reports from America’s homebuilders (DHI, BZH) has had Wall Street seeing a snowball effect as tighter lending standards and a soft market conspire to keep any potential turnarounds from occurring in our lifetimes…umm, just kidding.

Equally forceful in its impact, growing fears of the market star formerly known by the initials “PE” having problems raising capital for negotiated wheelings and dealings. DaimlerChrysler’s (DCX) postponement of its $12 billion private equity loan made that point. Investors fear an overextended LBO buyout boom may have hit a cyclical peak. The financials (XLF), already reeling from the fallout in the subprime market and increasing loan-loss announcements of late, were sent tail-spinning even lower (JPM, GS, C, BSC, MS, MER). As the market’s most heavily weighted sector, the move certainly aided in chopping down the broader averages with headline concerns of a spillover effect and looming credit crunch being more than considered by a fragile and spooked Wall Street.  

And finally, just when traders may have thought relief was on the way, a precipitous bout of profit-taking in the oil contract only made matters worse for the bulls. After pressing to a fresh eleven-month high of $77.24-a-barrel, a hard one day reversal down below $75, was not a well-received one for traders anticipating a ‘relief at the pump’ style rally. Unfortunately, the price drop negatively impacted the energy complex (XLE, OIH). The influential group had been one of the few safe havens for bulls of late. But in conjunction with a disappointing report from Exxon (XOM), the world’s largest company, and possibly fresh concerns of economic wobbles impacting worldwide demand for Black Gold: the math for catalysts in today’s market is all about adding up the negatives.

Market Snapshot

Figure 1: Russell 2000 (IWM) Daily Oversold

In the past couple of days since this report last warned of a looming corrective move, most of the market has obliged to a point. It’s true that this corner’s monthly canary in the coalmine, the NASDAQ (QQQQ), has been the most resistant to investors’ newfound sense of urgency regarding profit-taking. Elsewhere and in most market venues, though, a now very different financial landscape has once again provided a historical lesson on being a hedge hog in front of the Herd on the Street.

The view above of the Russell 2000 (IWM) does a fair job of depicting some of that ‘elsewhere’ behavior in much of the market. My observations find it to be a leader in the most oversold category with factors such as a 9.5% correction, zone support and well overdone and extreme RSI 14 reading.  

Excluding the Naz’100 which can thank a couple stocks like Apple (AAPL), Biogen (BIIB) and Intuitive Surgical (ISRG) for its most recent relative strength, a near universal swift percentage decliner puts most of the major averages well into corrective territories. The type of move witnessed can potentially mark a major bottom. That’s the good news. On the other hand, the bad news is any potential reaction lows beyond the bounce variety are still at much loftier levels than at any time during the past few years. Hence, the making of such technical benevolence is at increased risk of ultimately failing for longer-term strategists.

The following factors and anecdotal evidence might be considered relevant in determining a suitable, limited-risk strategy in the coming days and weeks ahead.

MARKET LAB

Bullish Technicals

• Nasdaq trades 3.2 billion shares, second largest ever and potential washout
• 97% of S&P500 trades down on the day, 143 of 147 Industry Groups lower
• Russell 2000 (IWM) 9.5% corrective move and 100% / 5-Day drop ‘mirror’ move of March decliner…is that Bill Gross’ 10% market call?
• S&P500 (SPY) at 50% March to July cycle test and prior February highs
• CBOE Volatility Index ($VIX) spikes to retest of four-year highs near 23.50%
• Dow Industrials 4.8% corrective, SP500 & Naz’ each near 5.8% corrective

Bearish Technicals

• Extremes, but no sign of technical turn entering Friday’s trade on both a price and sentiment basis
• Monthly chart influence still deserves consideration, although short-term appreciation for oversold conditions is front and center
• Intermediate strategists in need of Attempted Rally Day and then FTD for bullish trend confirmation
• Negative crowd psychology and potential oversold conditions beget further oversold

GROWTH STOCK ANALYSIS

Is the glass half full or half empty? It’s always tough to tell when faced with strongly overbought or oversold markets. Entering Friday, that’s thought to be a fairly accurate assessment of a Street gone ‘mad money.’ It’s fully realized the existing volatility make conditions as close to a “darned if you do, darned if you don’t” environment. Hence, attempting to find quality selections to update the lists below is likely a futile battle in the short-term. A couple nips and tucks, though, have been provided and might deserve further investigation by less-mad money limited risk strategists.

RADAR SCREEN

The following optionable stocks look to have a combination of technicals and fundamentals that might warrant further investigation based on a trader’s own methodology and risk acceptance. The list is not a recommendation and is intended for educational purposes only.

The Bulls

Table 1: Bull Watch list

Non-Directional Coilers

Table 2: Basing Watch list

The Bears

Table 3: Bear Watch list
 

Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
 
The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.

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