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Stock Market Snaps Some Late.....

Stock-Markets / Stock Markets 2010 Dec 14, 2010 - 02:50 AM GMT

By: Jack_Steiman

Stock-Markets

Sometimes you get too complacent and you have to pay a small price for that. For weeks now, we have seen the bull-bear spread get a bit out of hand on the too many bulls side of the ledger. To add to that, we are now seeing many daily put-call readings below .60. Anything below that is a red flag. On the equity side of the put-call ratio we are now seeing readings at .30. That is just not sustainable for further market upside. The end of the day today saw this kick in as the markets finished on their lows, well off the highs of the day. This too complacent situation is not the kiss of death for the market. Not by any means. It simply means the market has some cooling off to do to unwind the overbought daily and short-term charts. A deeper heavier sell is always possible, and, quite frankly, would be in the market's best interest, but the bull phase we're in is very powerful, thus, I'm not sure we get anything terrible from here, but the more we sell the better off we'll be for sure.


We need to stop the overly bullish attitude going on right now in this market, and the only way to do that is to scare people enough to get them out a bit, but I just can't tell how much selling we can expect. The deeper message here is to keep things on the light side in terms of your trading until a real new buy signal is flashed, which will allow us to then get more aggressive once again. If you get overly aggressive here you're likely to experience a bad time on all fronts, so again, use this time to watch and learn, and to get your best charts ready so you can buy when the time comes.

A lot of Nasdaq stocks did some huge reversals down today off the top. Some took huge hits right out of the gate. Stocks like Salesforce.com (CRM), Chipotle Mexican Grill, Inc. (CMG), Netflix, Inc. (NFLX), Plum Creek Timber Co. Inc. (PCL), F5 Networks, Inc. (FFIV), along with many others, took deep hits and put in short-term topping candles. It tells us the snap down has begun on some level, especially on those frothy, out of control, no reality, stocks. Some got absolutely whacked today. It's no fun getting in on froth at the top as those pullbacks get nasty fast as they're such high beta plays that, when it snaps, it snaps fast. You can be in the hole $20 to $30 very quickly. No fun!! When playing the world of no reality, you better be sure you're getting in these plays when the timing is as perfect as humanly possible. P/E's in 70 to 200 level on many of these, thus, the risk is enormous as the slightest bit of bad news on any one of these stocks can cause massive losses to you in a moments time.

Truth is, almost none of these stocks hold any reality to them. In the real world, would you pay 100 times for something? I think not, yet it's done all the time in the stock market. The super frothy 10/20 stocks we all know about can annihilate you in a flash. Only in bear markets are these stocks bought back to the truth, or the real world. Bear markets are about truth. Bull markets are about froth. Markets are usually frothy. The key is to make sure you know when some reality is coming to town. I don't think we're anywhere near a bear market at this time, thus, these stocks can be bought for more froth over time once the markets resets a bit.

China left interest rates alone last night, except for when banks borrow money from each other. Everyone was afraid that rates would be raised for everyone, and this would not have been looked upon favorably, especially for those commodity stocks. Those were the stocks that ran up the most early on today, but even those stocks gave away most, if not all, of their gains late. The fact that bank-to-bank lending rates are now going higher tells us that it's now only a matter of time before those rates are higher for each citizen of that country as they deal with soaring inflation, the exact opposite of our situation here in the states.

If you look a the cost of food here in the U.S. along with health care, and so on, I find that we, too, have some inflation issues, even though we're told that's not our problem. The truth is, we're more in a deflationary concerning cycle, but inflation always finds its way in to our lives. Sad reality. Fed Bernanke can't raise rates now for fear of a melt down for this country, even though there are inflationary headaches no one will admit to. That's for another time. Bottom line is, China will raise rates soon, but now their markets have time to prepare for it so it won't be a major shock when it hits.

There is nothing bad going on here. Bottom line is we need some selling within an ongoing bull phase. The selling should not get out of hand, but the sentiment issue is real and it'll be tougher and tougher to blast higher if all we do is keep going up. The snap down would be severe, so a little pause around here would definitely be best for all concerned. Keeping things on the very light side of things makes the most sense until the risk reward picture gets clearer.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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