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Stock Market Froth Breaks Lower

Stock-Markets / Stock Markets 2011 Jan 22, 2011 - 04:12 AM GMT

By: Jack_Steiman


If you're holding the classic froth high P/E stock you had one of the worst weeks of your trading lives. Slaughter's everywhere. If you're holding lower P/E stocks then you had a nothing from nothing week even though the averages sold off decently. Those high beta monsters destroyed the masses as usual. In the end they always end badly for most folks. The masses are buying the most right at the top as they can no longer handle not being in those frothy beasts. They figure they'll make a killing on the earnings report. They bought F5 Networks, Inc. (FFIV) and had their careers halted. You deal with -30 and see how it feels.

When RSI's on the daily and weekly index charts hit 70, or higher, you bail and run out of those super frothy high beta stocks and seek shelter in the lower beta plays until the market has appropriately unwound from overbought to neutral or even oversold. Those high beta stocks are the cause of this correction off the S&P 500 1296 highs. The Nasdaq had taken the biggest hit and is down nearly 4% already off the top. With many of the froth stocks putting in topping sticks for weeks or months to come, the market will likely struggle along, but it should not get crushed. Just play stocks that have less risk, and deal with the selling if you need to be involved, but the lesson for this week is simple. Keep it light. Be in heavy cash and only own lower beta low P/E vehicles for now.

The list of stocks that have snapped is very long, but to name just a few big time favorites, you need look no further than Apple Inc. (AAPL). Beyond that we have such favorites as Walter Energy Inc. (WLT), Alpha Natural Resources, Inc. (ANR), Netflix, Inc. (NFLX), Incorporated (PCLN), Freeport-McMoRan Copper & Gold Inc. (FCX), SPDR Gold Shares (GLD), iShares Silver Trust (SLV), and a list ten fold of that. These stocks are in mini bear markets and should basically be avoided for now. They'll always bounce, but for now, the down trend is in for these puppies.

Some had true sell signals, such as SPDR Gold Shares (GLD), which had massive volume distribution at recent tops. Others simply got too full as those 50 to 100, or more, P/E's needed a breather. Many had negative divergences. Lots of excuses and reasons to fall, and now that process is under way for the short-term. Even beasts, such as Inc. (AMZN), now have gaps below their 20-day exponential moving average which is putting in a top as it back tests.It sells once it touches the gap and the moving average simultaneously. That shows a stock is broken for the short term. So learn your lesson and avoid these plays until the proper buy signal is flashed somewhere down the road. Don't worry as we'll all have a chance to own froth again before you know it. Now is just not that time, but it will come again.

I do not believe the longer-term bull market is over. We can talk about how inappropriate that may be from a fundamental perspective, and I for one, would not argue with you. However, you have to play this game the way it's set-up to move, and from what I see from a technical perspective, is a market that will want to go higher over the months ahead once this froth correction has completed itself in the weeks and months ahead. There are no sell signals for the longer-term in play for the overall market. There is no distribution volume at the top, except for gold's recent highs. Good news is still being rewarded in the lower P/E plays. Nothing is out there suggesting the party is over, thus, when this correction is over there will be some great opportunities out there on the long side, but patience is key until that time arrives.

The S&P 500 has great support at 1271, or its 20-day exponential moving average, but that should go away in time during this correction. 1262 down to 1257 is great gap support, and then 1243 is the key 50-day exponential moving average. I don't think we'll lose that 50-day test during this correction, as long as we take it a day at a time as things unfold. Unwinding has begun, especially on the Nasdaq. There is more selling to come, folks, so be prepared for that. It won't be terrible, but more is coming. It won't be down every day, but down overall. Nice and easy with heavy cash being part of your world now.



Jack Steiman is author of ( ). Former columnist for, 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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© 2011

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constitutinginvestment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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