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Morning Cup Of Jo: When You're In a Hole, Stop Digging

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Yesterday's action is not something to be taken lightly and repairing the damage will take more than just a day or a week.

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"Never let the fear of striking out get in your way"
(Babe Ruth)



Key Points

  • Last week's sell-off most intense since 9-11
  • Buy fear ...sell greed
  • When you are in a hole, STOP DIGGING
  • 50-day moving averages will be ST resistance


Market Commentary

The last 'Jo' was penned the day after the initial watershed was dished out to the global markets. Looking back, much of the weakness and resulting volatility has stemmed from concerns about the unwinding the Yen / Dollar carry trade and the underlying possibility of a world-wide liquidity crunch. We ended with the following comment…

"…the extreme secondary indicators going off the charts…could be construed [by some] as a buying signal. Let there be no mistake! These[indicators] should only be deemed a buying signal after a correction has already occurred, not at the start."


Since then the markets have essentially traded flat. With the 150+ point intra day swings in the eldest sister it hardly seems that way, but it is what it is. Nonetheless, my firm's opinion stands pat regarding the probability of a multi-month consolidation. My firm doesn't subscribe to the theory one pundit noted on financial TV the other day calling the massive sell-off day "merely a flesh wound;" to paraphrase the Black Knight from Monty Python's 1975 movie "Quest for the Holy Grail." Rather, my firm would highlight another scene from the film: "Bring out your dead…but I'm not dead yet. You will be soon."

All kidding aside, last week the volume surged to 147% above the average weekly volume and was the second largest weekly distribution on record giving way only to the week the markets reopened after 9-11. That is unprecedented particularly because it would appear to have occurred at what now looks like the beginning of a long-awaited correction.

The concerns my firm has at this point are multifaceted and include fundamental as well as technicals. We also continue to watch a continuation of utter complacency by many market participants. Whether it is an end to a correction or a bear market, predominately they end with just the opposite – fear. Hence the adage, buy fear and sell greed. At this point there is still no real broad-based fear. This is the main reason, along with many technical indicators, why my firm believes this is just the beginning, not the end. It is only when you start to hear the words uttered, "Is this the beginning of a new Bear market?" when the fear might be enough to stem the tide.

The last Cup O' Jo's Eye on the Ball section outlined what my firm believed to be ST support levels on the DJIA, SPX, NDX and RTY (12,100 - 1,375 - 1740 – 770 respectively) that if broke could lead to (11,700 - 1,320 - 1,700 - 745). Monday's continued downward action left the sisters finding support at their respective 150-DMAs (12,040 - 1,374 - 1,710 – 760).

Taking a closer look at the charts…

DJIA

  • Downward sloping 50-dma first time since may of last year
  • Undercut the 12,100 on Monday 12,039
  • The 28th high will serve as ST resistance and Monday's low will serve as ST support. However, when I say ST I mean very ST.
  • If the markets can rally topside the 28th high they have the possibility to fill the gaps set-in on the first downfall day.
  • If they break the 5th lows my firm holds the opinion the next level is from where I outlined in the previous Jo



SPX

  • Went right to the next support at 1375 – 1374
  • Largest weekly distribution volume week since 9-11 and it's at the beginning
  • Largest test of upward channel bust




NDX



Russel



Let's finish up today's Jo with a few general thoughts.

The market is an interesting animal that must be respected at all times. The action my firm saw last week was likely a precursor to additional volatility. Global fears and the Yen carry trade remain the discussion recently–-my firm wonders if there is a focus on the symptoms or the actual disease. However, a rise in volatility and the corresponding whipsaws in the marketplace can be unnerving. It's important not to overtrade in this market. There will be opportunities on both sides and that is important to keep in mind. If you didn't quite play your cards right last week, go back and review the primary law about getting yourself out of a hole. When you're in one, stop digging. Normally this phrase is used to in a political or economic context but it certainly applies to investors and money managers alike.

With key data on the employment situation out tomorrow my firm thinks it remains prudent to manage risk and exposure levels.

Stay tuned & good luck!

No positions in stocks mentioned.

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