Wednesday, June 28, 2006
It feels like we have been in a deep bear market sell off during the month of June but the truth is the market has virtually gone nowhere since it marked what we considered a capitulation day on June 8. Yesterday's sell off simply brought stocks back to the bottom of the current trading range and in doing so inspired hapless options traders to once again take an overly bearish stance. For the first time in weeks both OEX and QQQQ options traders are in agreement. They agree that we are going to correct lower to the tune of buying more than 2 put options for every 1 call option. As our long time readers know, when this group of traders leans too hard one way they are almost always wrong. In fact the accuracy of their bad market calls has proven to be a very reliable reversal indicator. During this 6-week sell off the QQQQ cut through its 200-day average like a knife through butter, not even slowing down to take a rest. In our experience over the years bulls just do not give up on the 200-day average so easily. There were extenuating circumstances as the Japanese equivalent to the US Federal Reserve raised rates last month causing heavy institutional speculators to pull out of their huge metals and oil positions last month causing a world-wide market crash. This in turn caused the waterfall breakdown that forced the US investors to sell down to their comfort levels. Now however as things look ever so gloomy and the market looks to break down to another new low we think there is a very good chance that many will be surprised as the market rallies hard and regains the broken 200-day average on the QQQQ. Note the similarities between yesterday's sell off and October 27, 2005. With bears overly exuberant and with everyone scared, it will be interesting to see if the market does indeed once again surprise the greatest number of people and rally. Today we would like to see a consolidation day. This will give us time to evaluate which stocks to buy and which to avoid.