Sam Collins

Take Advantage of the Bears' Fears

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After Monday's big jump in the major indices, it was no surprise to have a day like yesterday when very little happened and stocks closed flat.

For most of the day, all of major averages were modestly negative, and the S&P 500 (SPX) and the Nasdaq (NASD) closed with small losses -- the S&P down 0.14% and the Nasdaq down 0.01%. But the Dow Jones Industrial Average (DJI) rallied in the last hour and closed with a gain of 0.2%.

Dow component American Express (AXP) rose 1.6% after announcing a successful October that saw billings up 3%. And Kraft Foods (KFT) gained 1% after saying that it would ask shareholders to approve the issuance of new stock for its proposed Cadbury PLC (CBY) deal. On Monday, Cadbury had turned down an offer from Kraft saying that the company was worth much more than KFT offered.

Gold and gold stocks were higher again yesterday for the seventh straight day. The metal rose 0.1% as investors again sought a haven from a sinking U.S. dollar.

At the close, the Dow was up 20 points to 10,247, the S&P 500 fell fractionally to 1,093, and the Nasdaq lost 3 points to 2,151. 

The NYSE traded just more than 1 billion shares with decliners ahead of advancers by 3-to-2. The Nasdaq traded 645 million shares with decliners ahead by 11-to-8.

December crude oil fell 38 cents to $79.05 a barrel following little damage from the recent storm in the Gulf of Mexico. The Energy Select Sector SPDR (XLE) gained 4 cents, closing at $58.21. December gold rose $1.10 to $1,109.70 an ounce, and the PHLX Gold/Silver Sector Index (XAU) rose 33 cents to $181.18.

What the Markets Are Saying

Yesterday's pause after Monday's big blowout caused some of the bears to roar again. S&P said, "The major indices have broken key trendline support off their respective March lows, and it appears that once a short-term kickback rally ends, more corrective action is in store."

It is true that the major indices (both the S&P 500 and Nasdaq) have broken below the major long-term support line, while the Dow has not. But the reason for the break is simply because the March low turned out to be a major market selling climax with the S&P 500 falling 125 points in less than a month. 

Following the first rally from the March low to the July correction low, the support lines are at the unusually steep angle of 45 degrees. Since it is virtually impossible to maintain a 45-degree slope for much more than three or four months, the break is to be expected and has little long-term significance.

Is there precedent for this phenomenon?