Time for a Bounce - or Else!

By Duru

March 20, 2004


We are back to leaning on the logic that "things are so bad that they have got to get better." The pain in the market right now is not evenly distributed. Tech stocks have been leading the market downward in the carnage department. This makes sense since they just recently led the market in sky-high valuation silliness. So, we see the S&P is down about 5%, the Dow 5%, and the Nazz over 10% from January/February highs. We also see that while the past two months have felt painful that given a year's perspective, complaining about the market here is like Rockefeller complaining that he can't find a single bargain on pants in the men's department at Macy's.

And that is the danger. Despite the apparent problems the market has had, there is still PLENTY of room to go lower. In fact, indices like the S&P small cap index and the bank index made new 52-week highs just a week and a half ago! The utility index did so this week. So how bad are things really? And what does the market look like when things are truly bad?

A lot of the pain you find in certain pockets of stocks. Big cap tech stocks have gone almost nowhere now for six months. Speculative stocks have been going through their own wild rides this year. Telecommunication stocks soared to infinity in January and have since plummeted to new depths of misery. We saw the madness in VoIP stocks that are now damaged again beyond repair. And even recently in March, we have had momentum players and other "speculites" run up any small-cap stock that reported a split or even a whiff of decent earnings AND, most importantly, and not seen an insane run-up in some time. All of these stocks have had their brief moments of glory and have largely since been completely crushed. This kind of stuff put together gives the market a sinking feeling.

In this sense, things are so bad, they have to get better, or else the various technical breakdowns that are still happening will begin to engulf the rest of the market - slowly but surely. So, for now, I am anticipating a decent rally that gets us back to major resistance levels. At that point, the inclination will be to sell and then watch. In past missives, I have made a habit of going over some of the red flags. I will mention the latest red flags that are of concern to me. This time, they are all in technology sector.

1. The latest sell-off in the QQQs (the buyable index of the NASDAQ100) has featured somewhat of a "stair-step" movement downward. That is, first comes a big leg or two down. Then the trading in a new lower range, and then the next whack or two. The chop and grind has been very methodical and slow enough to make you think things aren't so bad and due to turn around any moment. But for those watching closely, it is pure water torture - at some point, people decide they cannot take it anymore and completely bail.

2. I next looked at the charts some semiconductor stocks that I earlier noted looked like they were on the "edge of death." Sure enough, KLAC, AMAT, and INTC all had big sell-downs Friday - most of the losses came at the close. Now, ALL three of these semiconductor heavyweights are BELOW their 200 Daily Moving Averages (DMAs). The semiconductor index (the SOX) sold right down to its 200DMA. I have been amazed more people are not alarmed by the types of stocks that are now dipping below the 200DMA. Sure, the 50DMA, you can bounce back and pop back over that. But a dip below the 200DMA tells me a true change in character could be underway. How much longer before the major indices follow the SOX into technical chaos? Hopefully, we will get the answer sooner than later.

Be careful out there!


Ó DrDuru, 2004