May 21st, 2010

That Dog, "Accidental High-Yielders", Don’t Hunt

Wow, that was nasty. Today’s market close is 11.97% below the April 23 high of 1217.28 and many who haven’t cashed in some stock on the way down as dominoes mentioned in “U-Turn Ahead” on May 2 are probably asking themselves if it’s too late.

First, let me get something off my chest. To Cramer’s adoring fans, my response ignore his really stupid “accidental high-yielders” sales pitch. At this point, he can only justify it by saying “you can buy some now and buy more at a lower price later“. Give me a break! I’d love to take a survey today of how those who bought stocks off his last list of “accidental high-yielders” of a couple of weeks ago fell now as they see the value of their holdings cut by nearly 12%.

Can you explain again why I should buy a stock that pays 4%/year (that’s 1%/quarter) if it’s going to tumble another 10% over the next several months? Why not just wait until the market stops declining and buy it all then? Many stocks will only pay one quarterly dividend between now and Labor Day and that small dividend won’t offset the potentially larger principal loss over the next several months. As a friend from Tennessee once used to say, “that dog don’t hunt“.

Tomorrow is an options expiration day and the volume could be even higher than today’s and the moves even more volatile. You might buy tomorrow if you think the low of this correction will be hit tomorrow but I don’t think so. Today’s decline, in my humble opinion, puts the market just about half way through what would be a reasonable correction. The question you should be asking is not whether it’s the right time to buy dividend stocks (or any stock for that matter) but rather whether you should be selling more. The fallen dominoes to date include:

  • breaking below the 50-dma
  • breaking below the 100-dma
  • breaking below the 200-dma
  • breaking below the neckline of a potential head-and-shoulder reversal pattern

Dominoes still standing to break the fall:

  • the low of the January correction (which happens to also be the low of the 2004 correction. For an interesting analysis, see “Two Market Consolidation Models: 2004 and 1933-35” of Sept. 30, 2009) at 1050-1060
  • the 300-dma at 1032
  • the necklines of the Tech Bubble and Financial Crises crashes at around 940-960

That’s basically it standing between here and revisiting the crash bottoms somewhere around 700-800. I’m not trying to be an alarmist, just someone who’s concerned about preserving my capital. I’ve been saying for some time that my guess is we’ll make a stand in 940-960; in other words, we’re half-way there. Will the market reverse at that point? It’s to early to tell.

And then again, we could all be fooled and the market will turn around at the 300-dma just 3.8% below the current level. It won’t be the first time but I’m not betting on it.

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  • Anonymous

    Guru; are we due for a bounce to be sold into?thanks

  • Joe

    As I wrote above, I think there's another approximately 10% left to this correction. Is that enough room for you to still want to sell into? And then again, this thing could turn around.

    Only you can judge as to the amount of risk you can take if, on average, your stocks decline another 10% or the disappointment of having sold and missed an opportunity to recoup some previous losses.

  • Anonymous

    Hi Joe: Many seem to feel gold & mining stocks could skyrocket as all else crashes & burns! What do you think, has it happened before,I think people made big $ in gold during the 30's but I could be wrong.??

  • Joe

    Had you been a subscriber to Instant Alerts you would have seen we have had a sizable gold position for quite some time.

  • Anonymous

    edz up 50% …time to load up edc
    for a trade..

  • Anonymous

    If you sell some stock here or liquidate, in order to repurchase at a lower level then you could doubly lose if this is only a 10-12percent correction. I would recommend you to consider staying in the game and ride out any addtl correction lest losing on the up move from here. This is not strategy for the trader but for the investor.

  • Anonymous

    The technicals for gold are very bullish. When GLD is done correcting (anytime soon), GG could move back up to its highs. That would be a 20% advance. That could recoop a lot of losses during this market correction in the non-gold stocks

  • Anonymous

    … the RSI was at 28% last Thursday which is the same as in Mar 2009 and Feb 2010. To me the correction is over; we're all sold out and the markets have priced in the negative news.

  • Jesse

    Joe, thanks for posting the resistance numbers for the market. right now only 52% of stocks are still above there 200sma.

  • Anonymous

    Massssssive reverse head and shoulders in the 3 year chart. Must say that's bullish. Cash on the sidelines during the correction may not get in at the right time unless you are very, very (sq pwr) nimble.