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Bad News – Good News

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Introduction

Saturday, September 24, 2011

In complete contrast to last week’s 5.4% gain, this week’s 6.4% loss for The Dow Jones Industrial Average (DJIA)- the blue-chip barometer's worst five-session span since 2008. And the bearish riptide has whipped traders into a state of panic. After all, we’re teetering on the edge of new 52-week lows, and it seems as if the masses are certain it’s the beginning of a financial apocalypse.

Before selling all your stocks and sealing the hatch on your bunker though, you may want to stop, take a deep breath, and put this week’s pullback into perspective. The fact is, not only have we seen and survived dips of this magnitude before, we may have actually just seen a short-term bottom.

Too often, investors are too paralyzed with fear to buy when valuations get ridiculously low. News from the media.....

"Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc..

"About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg.

"Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show."

Seller’s Provide Opportunities

We have been seeing individual investors capitulating by selling stock even more than they did after the 2008 crash. That means a lot of the selling that would otherwise prevent prices from advancing is out of the way. If they jump back in and buy again, it pushes prices higher.

However, bear in mind that it's likely that we could get another long-term leg down after a nice intermediate-term rally, as demand is in control of the intermediate-term trend.

But every time we see bad news in the intermediate-term, it helps us in two ways:

1. It gives us a down day in the market to enter into bullish positions.

2. It clears some of the sellers out of the way who would have kept prices of our current long positions down!

“Let us check out the positioning on the S&P 500 in February, 2009”:

SPX-feb,2009


This is great for those who follow the true market (the internal market) and compare it to historic markets.

Hopefully, you have been able to keep from selling at that bottom like so many poor investors did in 2009.

We saw how oversold the market had become -- oversold levels not seen since the 2008 crash.

Make the Bad News turn into Good News for your trading profit!

Let’s Now Check Out the NYSE…….

Most of the time, the market is quite nominal — average movement, average volume, and an average opinion about its future. Every once in a blue moon though, things go haywire and push stocks to their limit.

Thursday was one of those days. We saw things you may one see once every few weeks, if not every few months. Funny thing about these rare occurrences, though — all of them almost always materialize not at the beginning of pullbacks, but at the end of them.

Take the number of ”NYSE” stocks hitting news lows as an example. On Thursday, 787 NYSE-listed stocks hit new 52-week lows. Normally, it’s closer to 50 NYSE equities hitting new lows on any given day. To see that many names do so poorly is a major hint of a bottom-making blowout.

And yes, there’s plenty of precedence for the idea, and we don’t even have to go that far back to find it. Remember Aug. 8 when the initial plunge of this rout finally found a floor? On that day, 1,306 NYSE stocks hit new 52-week lows – a clear statistical outlier number (see chart below). A week later, the S&P 500 had gained 7.5%.

NYSE-sept,2011



Can all these ‘new lows’ signal a bottom?

Actually, there’s an amazing correlation between a surging number of new 52-week lows and major bottoms. We’ve seen the phenomenon several times in the meantime, but the number of stocks hitting new lows back in late 2008 and early 2009 marked a string of major short-term lows, and even flagged the pivot out of the bear market. On, Oct. 24, 2008, 853 news lows set up a 14% run; on Nov. 20, 2008, 1,514 new lows came in front of a month-long 23% rally; and on March 6, 2009, 853 new lows from NYSE stocks ended up kick-starting a brand new bull market.

The Past

At first glance, it might have been easy to miss the part of the Fed's statement where the word "significant" had been added to the phrase "downside risks to the global economy."

But it wasn't missed for long.

Future/Present Problems

• The Dow's sickening 283-point plunge Wednesday afternoon extended into yesterday. The Dow was off nearly 500 points at its worst.

• Judging by the MSCI All-Country World Index, which is now down +20%, global equities are in a bear market. It also seems like investors are now pricing in a recession. As well as the addition to the issues in Europe, inflation in China has accelerated to a 3-year high.

• Even though Europe is in the headlines, weakness in the Chinese economy could be the straw that breaks the market's back. China's been combating inflation for over a year, tightening lending standards and raising loan reserves. And inflation had started to slow. But this renewed acceleration means that China will continue to act to calm inflation and slow its economy.

• The Greece debacle with defaults looming is still on the horizon, even with a pledge by the G20 to "do something" to remedy the situation.

• The Dow is teetering at a 52-week low. And we'll likely see a new 52-week low before it's all said and done. Because there will have to be some clarity of whether we will actually see another round of recession. And we're not likely to get that clarity in the near future.

What to Do Now?

Maybe you missed the chance to buy Goldman Sachs (NYSE:GS) in the $70s or Microsoft (Nasdaq:MSFT) under $20 when the market bottomed in March of 2009.

Well, there are further opportunities to buy quality stocks at extreme lows coming...

Anticipating the swings in the stock market are an all important technique that you need to establish to profit, this is where ”S.O.M.E.” gains its' importance, particularly with their continued success in options trading.

Two financial stocks to watch are Bank of America (NYSE:BAC) and Citi (NYSE:C). Both are in better shape than they were at the depths of the financial crisis, and Citi, especially is approaching those lows.

Also in the tech sector, both Intel (Nasdaq:INTC) and Microsoft (Nasdaq:MSFT) have shown relative strength lately. And while Microsoft was down with the market yesterday, Intel again showed relative strength. Nvidia (Nasdaq:NVDA) at $12 or below is also a consideration.

Finally, there are oil stocks. Oil was absolutely killed yesterday. But we should all be well aware that it can -- and will -- bounce strongly when money returns to the financial markets.

The opportunities afforded by this market are definitely ripe for options trading!


”Success is simple. Do what's right, the right way, at the right time.”


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