May 21st, 2010
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.