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Is the Cyclical Bull on Its Last Legs?


If weakened internals fail to get back in sync with the market, that would give us something to worry about.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

Even though one might blame it on a "keyboard malfunction," the charts are now reflecting yesterday's reality. The oversold conditions have become quite pronounced. That might offer nimble traders opportunities, but the combination of global uncertainties after a significant decline might not bode well for intermediate-term longs.

If I were allowed to voice only one concern, it would be the sudden appearance of four 90% downside days so close to new highs! The last time that occurred in a bull market was in July and August 2007. Even though the markets managed to climb back over the course of the next few weeks (key indexes even made their highs in Oct 2007), the market internals were never really able to recover from that onslaught.

That begs the question: Is the cyclical bull on its last legs?

The clues to look for in the intermediate term: The quality of the bounce becomes very important to monitor. If weakened internals fail to get back in sync with the market, that would give us something to worry about.

The takeaway in the short term: After a major negative event, it's usually very hard for markets (and people) to carry on as if nothing has happened. That can lead to more emotional meltdowns along the way (nothing like yesterday, though). I'd stay away from the most popular individual names. The market indexes usually fare better in choppy declines compared to stocks. If one is looking for an upside edge, then individual names help; if looking for protection and safety, indexes usually provide that. Right after small position size.
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