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Stock Market Correcting...

Stock-Markets / Stock Markets 2012 Oct 20, 2012 - 01:37 PM GMT

By: Jack_Steiman

Stock-Markets

You probably expected a much more dramatic title, but there's nothing bad going on here. The market is barely down off the recent highs, so a pullback of a few percent doesn't mean very much. Things look worse than they really are off the top. That doesn't mean things aren't about to get worse as they probably are to some degree, but it's important to make the distinction between something being bearish or just pulling back to unwind things. If you're wondering what I'm talking about, look at the charts folks. S&P 500 is 3% off the top. That's it. Yes, the Nasdaq 100 is leading down, but the majority of the market is hardly down enough worth talking about off the recent highs. We got very overbought for a long period of time. We had sentiment getting stretched out. Nearly 30% spread in the bull-bear war, now in the teens. But the numbers were up there on everything from sentiment to just about every last oscillators.



It took quite some time for the snap down to start, but it finally did, and now the selling is more intense. The key is making sure you don't get hurt when it hits. We have certainly avoided taking on any unnecessary pain. In time things will turn back up, but we're not close to that moment for now. A defensive posture is how you play the game in which we're involved. If you get too antsy you'll take on more pain than you want to deal with, so be wise and lose the getting in too soon headache man traders have to deal with due to impatience. The selling has begun and begun with some pop behind it. I prefer fast and nasty to slow and easy. The market is speaking. It's saying get out of my way for now. Do just that.

The market started off with a decent, but not too intense, gap down as the bell rang to open trading. The market was dealing with some very poor earnings reports from last night through this morning pre-market. Some huge leaders giving bad news on future earnings, and with quite a few already having done so in the prior days, the weight of all this bad news finally hit as trading opened up. Yesterday, midday through this morning, we had to deal with some really bad news from Google Inc. (GOOG), Microsoft Corporation (MSFT), McDonald's Corp. (MCD), Chipotle Mexican Grill, Inc. (CMG), Mellanox Technologies, Ltd. (MLNX) and General Electric Company (GE). Prior to that we had to deal with Intel Corporation (INTC) and International Business Machines Corp. (IBM).

There's just too much stress. The selling started to accelerate when broken heavily weighted stocks started to sell hard. Apple Inc. (AAPL), Priceline.com Inc. (PCLN), along with the group mentioned above, and down we went with some real thunderbolts behind the move. It didn't stop all day. Not a single rally during the day to give the bulls any hope whatsoever. The bears kept the pressure on from the outset and didn't let up the way they should when things are bad on the earnings front. Some incredible losses in individual names. AAPL, PCLN, CMG to name a few, but that really is just to name a few. Ugly throughout. When all was said and done it was time to recognize that what took place will likely have follow-through, whether or not we rally a bit off short-term oversold or not. A day for the bears. It's been a while, but today they celebrated.

The one aspect of this market that had been unique for a while, even with some terrible reports in the world of technology, was the fact that while many sectors sold off hard, many others were picking up the slack. While the semiconductors and technology stocks fell, there was great action in the transports, banks, materials, biotech's, along with many others. That came to a major halt today. Nothing backed up the bad news coming from the land of technology. The metals fell. The banks fell. Transports and everything else fell as well. No defensive safety trades were taking place.

The selling was across the board. This is what finally allowed the market to have such a nasty selling episode today. The bigger question now becomes is whether this is now the trend or just a one-time event. The selling was very intense, thus, it suggests there is more to come in those areas that once held up so well. This tells me some deeper selling will likely take place in time. Not market crash selling but some decent selling could take place that will scare the majority of folks. For today, we saw rotation go away, and that is a red flag for deeper selling over time.

In the end, it's all about the need to unwind things to levels from which the market can try higher again. The buying was intense and lasted a longer time than most expected. We stayed overbought far too long. That never ends well over time. It feels good when it's taking place but in time, that all goes away harder than most think likely. Here it is in front of our eyes. Most are asking if this is the beginning of the end for this market. You all have opinions. You all will be guided to some degree by your emotions. Remember, an up market is easy. It requires no emotion. You go with the flow. When market sells, the emotion rises greatly. Fear enters and when fear enters, even if the selling is one tenth of the recent buying, panic can set in. It's just the way we're all built.

Don't let what's taking place, and likely still to come, make you think that something's happening that really may not be. There is no distribution selling off the top. Good earnings reports are being rewarded. There are other factors. There is still nothing to suggest that this isn't simply the pullback the market desperately needed for some time. Now that it's here it's creating solid fear, which is exactly what the market needed. The bigger picture market still looks solid even if we sell another 5% or so.

The S&P 500, the sector most watched, although I think the Nasdaq is more important, has its 50-day exponential moving average at 1430. We're right there. It's likely to get taken out in time. That does not mean it's death to the bull trend. It means that, because the market had been rising overall for quite some time, the 50-day was rising along with it, and thus, not far from the recent high prices. It means it wouldn't take much to lose it. Only a drop over three percent off those recent highs. We can fall another 50 S&P 500 points, and the bigger picture would not be damaged. It'll feel scary but, if you play appropriately, you'll get through it with no problem. The selling is healthy for the market for the longer-term. If something occurs that says I should view the market differently I will make the necessary adjustments over time.

For now, you simply take it nice and slow, and remain as we have thus far out of harm's way.

Breathe!

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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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 constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.


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