Sam Collins

Stay In or Get Out?

by Sam Collins   11/20/08

After holding at well-defined trading zones since Oct. 10, the stock market plummeted through support on one of the ugliest days of the bear market of 2008. Leading the pack lower were the financial stocks and worst of all was Citicorp (C), which fell more than 23% as a result of taking on another $17.4 billion in structured investments.

But there were other catalysts for the wholesale selling including concern over the possible bankruptcies of the major U.S. auto makers, the lowest-ever residential construction report, and a Fed report that forecasts economic growth at zero to 0.3% for 2008 and at negative 0.2% to 1.1% for 2009.

The Labor Department reported that consumer prices fell a record 1% in October, which is the biggest drop since records were begun in 1947. Most of the drop was due to falling fuel prices, but the fall makes economists uneasy because it could be an indicator of a deflating economy.

As noted, the financial sector suffered the biggest losses, and life insurance companies took broad hits along with banks and mortgage companies.

Hartford Financial Services (HIG) fell 28.88% due to its more than $15 billion of exposure to mortgage-backed securities, and both MetLife (MET) and Prudential Financial (PRU) fell, as well. MetLife said it has a $35.9 billion commercial mortgage portfolio with an average loan-to-value of 57% and it also holds about $15.9 billion of commercial mortgage-backed securities, of which more than 95% is rated 'AAA' or 'AA.'

At the close, the Dow Jones Industrial Average (DJI) fell 427 points to 7,997. The S&P 500 (SPX) lost 53 points to close at 807 -- its lowest level since March 2003. The Nasdaq (NASD) fell 97 points to 1,386, its lowest since April 2003.

The New York Stock Exchange traded more than 1.6 billion shares, and on the Nasdaq, nearly 1.1 billion shares traded. Breadth on the NYSE was a negative 15-to-1 and on the Nasdaq it was 8-to-1.

What the Markets Are Saying

The buy alert is canceled -- the support was violated.

After holding at the S&P 500's (SPX) support at 840 for almost seven weeks, a broader-based sell-off plunged prices through the S&P's support, and that of the other key indices, too.

As noted in yesterday's buy alert, if the market closed under major Collins-Bollinger Reversal (CBR) signals, those signals automatically revert to new strong sell signals.

But other indicators are so oversold that, for the present, we will go to a neutral stance for short-term investors, while issuing a new bear market sell-alert for long-term investors.

Technically, the next support for the S&P 500 is at the Oct. 9, 2002, closing low of 777, and that is the next target.

But with the internal and sentiment indicators now so oversold, it is likely that a rally of some substance could develop, driving prices up into the support zone that was just violated -- thus the more neutral stance for traders. Note, too, that on Friday, November options expire setting up the possibility of a wild day punctuated by a raid on the shorts.

One of the advantages of the CBR system is that it places buy signals at critical lower support zones, and that enables the trader to quickly close a position, take a modest loss, and move on when the support is violated -- and that's exactly what happened yesterday.

So if you are trading or a longer-term investor, you should sell any new positions at the first opportunity and short Exchange-Traded Funds (ETFs) on a temporary recovery in the market. Stayed tuned -- "it ain't over 'til it's over."

Today's Trading Landscape

Earnings to be reported include: Earnings to be reported include: Actividentity (ACTI), Agilysys (AGYS), Aries Maritime Transport Ltd (RAMS), Aruba Networks (ARUN), Autodesk (ADSK), Barnes and Noble (BKS) and Blue Square - Israel (BSI), Buckle (BKE).

Chordiant Software (CHRD), Cost Plus (CPWM), Datawatch (DWCH), Dell (DELL), Dick's Sporting Goods (DKS), Digimarc Corp (DMRC), Ditech Networks (DITC), Edap TMS (EDAP), E-House (China) Holdings Ltd (EJ) and Foot Locker (FL).

Gamestop Corp (GME), Gap (GPS), Griffon (GFF), Helmerich & Payne (HP), Hibbett Sports (HIBB), Hurray Holding Co Ltd (HRAY), Limited Brands (LTD), Met-Pro (MPR), National Grid (NGG), New York & Co (NWY), Ninetowns Internet Technology Group Co Ltd (NINE) and Novatel Wireless (NVTL).

Pantry (PTRY), PennantPark Investment Corp (PNNT), Perry Ellis Int'l (PERY), Salesforce.com (CRM), Sally Beauty Co (SBH), School Specialty (SCHS), Shoe Carnival (SCVL), Stage Stores (SSI), Stein Mart (SMRT), Suntech Power Holdings Co Ltd (STP), Sycamore Networks (SCMR), Tefron (TFR) and Telvent (TLVT).

The Cato Corp (CTR), The Children's Place Retail Stores (PLCE), TOP Ships (TOPS), Trans World Entertainment Corp (TWMC), TransDigm Group (TDG), Unify Corp (UNFY), Wet Seal (WTSLA) and Zumiez (ZUMZ).

The following economic reports are due today: initial jobless claims for the week of Nov. 18 week (the consensus expects negative 11,000), October Conference Board Leading Indicators (the consensus expects negative 0.6%), November Philadelphia Fed Business Index (the consensus expects negative 38), and the DJ-BTMU Business Barometer for Nov. 8.

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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.