Friday, May 19, 2006
Taking the current market conditions and framing them with a historical perspective a relief bounce is overdue. Likewise, using that same historical frame of reference, due to the extreme oversold condition the indices are now in the relief rally should be strong. The problem over the last few days however has been that too many people have been looking for just that relief rally. Too much bottom fishing has been taking place. It works like this: traders trying to buy the bottom tick before the bounce that everyone anticipates will buy as stocks trade near their daily lows. When stocks subsequently drift even lower stops get triggered and selling compounds. In other words, the bottom fishers are fueling the market's decline. So, theoretically we are very close to a bounce, but if too many people continue to bet on this then the market could be in real trouble here. Ironically, trying to buy the bottom tick before prices reverse, is becoming more and more risky the further the market declines. Why? Because some have been buying quite heavily into this decline and if the pain eventually becomes too great for them and they are forced to stop out the dam could burst and what started as a correction could turn into a crash. We are by no means predicting a crash. What we are trying to point out however is that trying to enter before the turn confirms itself is the best way to lose money in the market. Once the market capitulates there will be plenty of time to take advantage of the relief bounce. Stocks and markets just do not reverse in "V" type patterns leaving those who did not buy the bottom tick behind. Be patient here and be in cash until we have confirmation that the selling is drying up. As of Thursday's close, we have no evidence that buyers are regaining control.