May 13th, 2009

Explaining Today’s Decline

Today’s market shouldn’t come as any surprise to those of you who read this past Saturday’s post in which I compared the current Bear Market Bottom with those of the 1973 and 2003 Bear Markets. The action today is following the script exactly and is exactly in line with what we envisioned.

Most who are enslaved to the fundamentalist way of looking at things had to search for an explanation. For example, Cramer opened his show today saying the 2.7% move down today and the money flowing in consumer staples is attributable to “people pulling money out of the leaders, like oil, tech, and the banks, and moving into defensive names. What changed? …. the weaker-than-expected retail sales numbers, along with Obama’s call for tax hikes and bank executive pay cuts have the markets worried.”

I say it’s because the market had to digest the gains since March 9 and a correction was overdue. That the declines – which started on Monday – curiously began after my Saturday entry wasn’t mentioned by anyone. Sure, Doug Kass gets a 2-hour guest host slot on CNBC’s morning Squack Box for his March call or a “generational bottom” but will I get even small nod of recognition for my prescient call about Friday’s short-term top? I’m not holding my breath.

What should we be looking for as the Market begins to test support levels? Let’s look at what happened last May when the Market last touched the 180-day moving average:

Note: 1) the Index touched the 180-day but unable to remain above, 2) the 60- temporarily crossed above to 90-day Moving Average and 3) the Index fell below those slower MA’s leading to a major decline.

And the current situation:

Very similar: 1) Index touched its 180-day average and 2) the 60- is about to cross the 90-day MA.

Will it be different this time? Will a head-and-shoulder reversal pattern be completed? Will positive economic news emerge (the green shoots actually flower) and favorable market sentiment return through the summer? No one can know for sure. We’ll just have to wait and see.

This is exactly why you’ve long been reading here that we wait for the market to issue a “green light”, an all-clear, before again becoming again fully invested in the market. Until that happens, you could make a short-term play through adding some SDS, the Proshares S&P double shorts – I did. But you’ll have to remain nimble and take the position off should the correction be shorter or less deep than anticipated. In the meanwhile, I still have a big toe in precious metals, hard commodities, foreign markets and foreign currency.

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