Caution:
Whipsaws ahead.
Friday's headline, which I called "Tricky", is even more relevant
now. Thursday's rally could have easily sucked in the folks who
may have thought we have seen the worst of the pullback. Well we
know that was not the case and I suspect this type of action could
continue.
With Friday's 200 plus point loss in the Dow (-2%) I am hearing more
talk from people anxious to jump back into the market rather than folks
talking about being nervous. As contrarian investors we know we'd
rather buy fear than complacency. Here's where the tricky part
comes in again. The chances of being caught in a whipsaw, that is
buying stocks only to see them go down, then selling only to see them go
up, is getting higher. The steep sell off Friday is likely to
bring a snap back rally sooner rather than later, but in an environment
such as this, it may not last too long.
I know this is what got me in trouble in October as I bought back into
the market, but my fear of another push down, after a
particularly weak day, scared me out of the market when I should have
stayed in. The difference this time is that the market is not yet
oversold on an intermediate term timeframe. Back in October the
NYSE was pretty deep into oversold territory.
Chart provided courtesy of
www.decisionpoint.com
The other difference is sentiment. These type of drops raise
concerns in investors but usually not to the point of fear until a
pullback sticks around for awhile. As an example take a look at
the bullish and bearish percentage back in September and October below.
A pullback for a week or so in September saw the bearish percentage
(those who believed the market was going lower) go from 29% to just 31%.
That's pretty complacent. A small rally followed before a steeper
pullback brought the bearish numbers closer to 50%. That coincides
with the oversold condition in the above chart. That was a good
time to buy.
Chart provided courtesy of
www.decisionpoint.com
These numbers have likely changed as this survey was taken last
Wednesday, but you can see that the bearish percentage is currently only
26%. Combine that with the neutral overbought/oversold reading and
I would say that any bounce will be sold again. That will likely
cause the whipsaw action I mentioned above.
We are seeing that in Japan right now. After some huge losses
earlier last week, the Nikkei bounced back with a big day Friday.
But as I write this Sunday night (Monday afternoon their time) they are
down over 2% again. It is tricky and now we are in a similar
situation.
We hate to miss out on a rally, but missing a large
downdraft is the key to beating the market.
From a technical standpoint, the Dow has broken down a bit more than the
S&P 500. The Dow is now down for the year and has now made a lower
low on the chart. It is also now trading below its 50-day moving
average. The S&P 500 is sitting on the 50-day moving average and
is still up about 1% on the year.
Chart provided courtesy of
www.decisionpoint.com
The dollar is still trading in its tight trading range just ready to
breakout one way or the other. For that reason, playing the I fund
right now is also very tricky. If the dollar breaks to the upside
it could get ugly for the I fund. If the dollar breaks to the
downside there could be some big gains, particularly if the overseas
markets rebound. It's one of those where you have to know your
tolerance for risk.
Bonds rebounded Friday and the G fund should pay the penny today or
Tuesday.
If the market opens to the downside by any significant amount it may be
worth a play to get into the stock funds for a while.
Sentimentrader.com did some research which suggested that 10 days after
action which we have seen this past week,
higher prices are likely
- that is
2.5 stocks rose for every one stock that was down on
Thursday and on Friday
2.5 stocks were down for every one stock that was up, all while the S&P
was within 1% of new 52-week high. But that reaction tends to be
short lived and lower prices were likely after those 10 days.
Unfortunately for us it is not yet time to jump in for the long term.
You could always ease in with small percentages (dollar cost averaging).
If you want to try to pick up a few points in stocks you could get
in now with the intent to get out again if we get a rally. The
problem is sometimes the rallies and drops happen intraday or after the
deadline and our TSP accounts can not be that nimble. Be careful.
This is how you get caught in those whipsaws.
That's all for today. I am currently
100% F fund. I could make a move sometime this week. Thanks
for reading.
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