Stock Market More and More Chum

Stock-Markets / Stock Markets 2010 Apr 07, 2010 - 03:56 AM GMT

The market can not blast higher but has been able to grind higher. There is a reason for this. When markets get full or mature short term only, they need some selling to unwind these overbought conditions. The bull keeps it grinding higher and we have been great beneficiaries of this, but the reality is, there can be no real blast off from here without some real selling first. You can feel the "fullness" of this market. It tried to overcome early morning selling and did its usual good job of doing so but all day was spent in grind mode. The rubber band will snap.

When some real selling hits it'll open up the door to much better buys. From here, everything will be tough. Easy money is over. Tough times are here short-term but that should be short-term only. S&P 500 1151 will be a wall of support on any deep selling and it's unlikely we'll even sell down that far although it is possible for sure. The market needs a pause and its coming. Please don't get aggressive here. The last buy today, Apollo Group Inc. (APOL), was probably a bit too aggressive but we can handle one play that was too late considering the past two months. Great set-up and over time it will be very solid so no worries. The market needs a time out!

We gapped down on no real news, and I have to say, I was rooting deep down for the selling to stick. The retail crowd would have nothing to do with it. Chasing all weakness. Typical these days and relentless by the bulls. The market grinded higher, led as usual, by risk trades or the technology stocks in the Nasdaq. The good news technically is the Nasdaq did close well over the open although the Dow and S&P 500 lagged badly.

Bifurcation today isn't the best news but with technology leading you can't know when the exact moment will come when the selling kicks in. I know it's coming and there's no need for aggression here but today's action says no way do you short. Although we are close and really need to sell, you NEVER short a bull market. I can't make it more simple for all of you than that. The reason? We all know by now that bull markets stay ridiculously overbought a lot longer than you can ever imagine so let's keep it simple. No shorting the bull.

Sentiment figures come out tomorrow and I am very anxious to see how extended we are in terms of complacency. Have we gone over the 30% level which screams red flag or have the bears held on strongly enough to keep the spread in the 20's is what I am curious to know. It was close to 305 coming in to this week and with the way the market acted late last week and is acting early on this week, you get the feeling the 30% level has been taken out. If so, you still stay long but you cut things down considerably on the long side. Once it reaches past 33% or so you go cash with no more than one to two plays out at any time. Again, you don't short because you don't know the moment we start to sell. It took 37.5% last time to get a 9% correction. it can take more than that or a little less this time but the point is, once over 30% the red flag goes up. Once over 33/345, major league red flag goes up.

I can't tell all of you or make my point hard enough as to the danger of shorting a bull market. I am talking a lot about this tonight because I am getting a higher than usual number of emails and calls regarding "When do we short'? Oh man, that drives me nuts! Think about if some of you, or if I, started shorting on the first overbought signal nearly two months back. Think about what we would have missed and think about how badly we would have been crushed! Many who have missed the bull run want an excuse to short as if to justify it was alright to miss the bull because now I'll nail the short side. Bad thinking.

Others want to try and be cute and nail some shorts by getting lucky at the right moment because we just can't go higher any more. I am a big advocate of the need to sell here and there are some real reasons to expect some, but always understand what's in place and adjust to that reality and nothing else. We are in a bull market thus never short. Also, pullback's are short lived so even if you get lucky enough to short at the right moment, chances are strong you'll stay in too long anyway and give back the fortunate gains.

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.

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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