Tags: mike | swanson | stocks

Swanson: Not Time to Sell

By    |   Monday, 02 November 2009 10:08 AM

On Friday the Dow fell over 200 points and the S&P 500 closed below 1,040 as we saw another day of panic selling in the market. On Wednesday we saw panic as the VIX jumped up over 10 percent, the number of sell orders outpaced buy orders on the Nasdaq by over 9 to 1, and the put/call ratio closed above 1.

On Thursday I put out a video and article saying that we saw pure panic in the market and it likely bottomed. Then we got a rally, but Friday saw the market go through the lows it set Wednesday with even more panic coming in. The VIX actually went up 20 percent!

It's very unusual action. You would be hard pressed to find a time in the past where the market had two panic selling days that close to one another. Really the only time I can find a time where that happened was last year in the fall.

Other than that, whenever you got a panic day you almost always saw the market correction or downdraft come to an end.

This morning futures are up as there was a drop in Asian markets on their opening that led to a rally by their close and a rally in European markets.

I think it likely we'll see the market rally for the next three to five days and then go into a down to sideways mode for a few weeks before turning higher and having another big run. But we may have seen the low of the correction last week. If not, then I'd look for a final low in the 990 to 1,015 area of the S&P 500. But one shouldn't be too negative about this market and if you aren't in anything you should be looking to use weakness as a place to buy.

This certainly is not time to sell.

However, at this point I know this is the minority viewpoint and the odds are you are now very skeptical about this market. I received about two dozen e-mails from people who are thinking about selling now. A lot of people forwarded me articles from other trading services they subscribe to or just things they read online where people are calling for much more selling. Some in fact are saying this is the start of a stock market crash or a new bear market.

In my reading over the weekend I couldn't find one single person who said now is the time to buy.

Not one!

Here are some things you need to think about. I believe people are so scared because of recent memories of last year’s stock market crash and the first quarter drop of this year and don't want to suffer again through something similar.

The thing is, though, stock market crashes and bear markets do not happen all of a sudden. Last year’s fall crash happened after the market almost crashed two or three times — in August of 2007 and January 2008. There was intense selling and an accelerating bear market that led into the crash.

Going into a bear market or crash market internals break down and you get some false rallies and sideways action. The market spends some time below its long-term 150 and 200-day moving averages. Even in the 1987 stock market crash the market averages spent a few weeks below these moving averages before the market crashed.

If the market is really going into a bear market or crash you would expect to see a short-lived rally from here following last week's panic that would end with a failed rally and then a few weeks of sideways action to lead into a collapse.

We would see much deterioration in the advance/decline line and other internal indicators, so we'd have plenty of warning.

And that means there is no reason for you to be all scared about the stock market.

To me, I don't think the bull run is over. I think the market is going to continue higher until we get to the next cycle of interest rate increases sometimes next year — probably the second half of next year. So I still think this is a market destined to go higher into the end of this year and the first quarter of next year. But, I'm keeping my eye on the pulse of the market in case it signals that real changes are happening.

I do think last week's sell-off is going to lead to a slight change in character for the stock market.

The action reminds me of a correction that occurred in March 2007. Back then you had a very sharp and sudden 10 percent or so drop with intense selling like we saw last week. The news was talking about a reversal of a yen/carry trade that didn't happen, just as now they are talking about a supposed rally in the dollar.

After that correction the market went sideways for about a month and then broke out to new highs to launch the final rally of that last bull market.

What was interesting, though, is that correction did lead to a change in character in the market. From that point on, the advance/decline line diverged from the stock market while fewer and fewer stocks went up with the averages.

It is possible that this correction could be a sign that we are now in the 7th or 8th inning of this bull market and that from now on the market will be led by fewer and fewer sectors and individual stocks.

That's something we'll have to keep an eye out for.

A lot of people are making a big deal over the fact that the market closed below the lower trend line connecting its March, July, and October lows. They are saying that means the stock market run is over.

Not necessarily.

Closes above uptrends lines don't usually mean a new bull market is starting and closes below them don't mean that bear markets are beginning, either.

They may mean that, but it takes more than just that happening to lead to a change in the long-term trend.

What they mean is the upside momentum is over — for the time being.

When the trend line is broken it means the market is either going to go sideways for a period of time and then begin a new run higher or that a new big downtrend is happening.

It means one of the two — not just automatically that everything is bearish.

My guess is that the market is going to bounce up from here and then go into a trading range from now to the end of this month or early December and then make another move higher in a rally that lasts for weeks maybe even a few months. It is possible that during this sideways phase we'll see the market go through this low here, with the S&P 500 falling to its next support level in the 990 to 1,010 area. Such a thing would bring it down to its 150- or 200-day moving average by November and make for a wonderful buying opportunity.

If that were to happen I still would think the market is going to go higher into the end of the year. It would be a similar type of corrective phase we saw in June and July after the market broke that support trend line.

Either way, right now I expect the market to higher for the next few days and then go into a sideways to down phase that will lead to a big rally at the end of the year.

I'm going to make some adjustments to my portfolio after the next bounce, probably at the end of this week. I want to sell some lagging stocks and look to buy back into some new stocks later this month.

The action in individual sectors and stocks leads me to believe that we are going to see some sideways action and then a move higher but that many stocks will end up lagging on the next big rally at the end of the year.

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On Friday the Dow fell over 200 points and the S&P 500 closed below 1,040 as we saw another day of panic selling in the market. On Wednesday we saw panic as the VIX jumped up over 10 percent, the number of sell orders outpaced buy orders on the Nasdaq by over 9 to 1, and...
Monday, 02 November 2009 10:08 AM
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