Stocks Tank As Correction Take Hold

Wednesday, May 5, 2010
Market Commentary:

The major averages ended lower one day after sliding into a correction as the US dollar rallied and the euro tumbled. Volume totals ended mixed; higher on the Nasdaq composite and lower on the NYSE compared to Tuesday’s lofty levels. It was not encouraging to see the NYSE, Nasdaq and S&P 500 index all close below their respective 50 DMA lines on above average volume. Decliners trumped advancers by nearly a 4-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq exchange. New 52-week highs outnumbered new 52-week lows on the NYSE but trailed on the Nasdaq exchange for the first time since February. There were only 6 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, down from the 7 issues that appeared on the prior session. Waning leadership has been evidenced by the recent lack of stocks making new highs as the rally came under pressure.

5 Reasons Why We Have Been Cautious In Recent Weeks:

The market slid into a correction on Tuesday after a series of ominous factors dragged stocks lower. In recent weeks, we have seen a spike in volatility (after a large move from the February lows) which is usually a sign that trouble may be lurking. Second, the number of distribution days surged in recent weeks which suggests large institutional investors are selling stocks.

Third, the geopolitical mess in Europe ‘gapped down’ in recent weeks, evidenced by the sharp decline in the euro. Fourth, the number of high ranked breakouts dried up significantly since mid-April which increased the odds of a near term pullback. It was also disconcerting to see the price and volume for stock markets around the world plunge as the dollar rallied. The MSCI World Index of stocks erased its 2010 gain as the euro skidded to a fresh 14-month low. Finally, it has been worrisome to see most of the major averages slice below their respective 50 DMA lines. At this point, it will be very important to see how low the market goes before the bulls show up and defend support.

Market Action- In A Correction:

The market is currently in a correction which, according to historical precedent, suggests 3 out of 4 stocks will follow the market lower until a new follow-through day emerges. That said, taking the appropriate action on a case-by-case basis with your stocks prompts investors to raise cash when any holdings start getting in trouble.  It is also important to note that the major averages have experienced multiple “corrections” since the March 2009 lows and each one has been mild at best (less than a -10% decline from the recent high). Therefore, it will be very interesting to see how low this correction goes before the bulls show up and defend support. Additionally, it is important to note that the market can go much lower (or higher) than anyone thinks; so it is of the utmost importance to filter out the “noise” and carefully analyze price and volume action of the major average for the best read on the health of the market.  

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