The Safest Strategy for the Current Market


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Stocks opened strong yesterday and quickly ran to multi-month highs on a revised GDP report, which showed a growth rate of 1.7%, up from 1.6%. It also reported a 2.2% increase in personal consumption, up from the 2% that was reported earlier.

The resulting euphoria drove the Dow Industrials up 113 points to a new high for September. However, the buying only lasted for about 20 minutes before sellers swamped the trading floors with an avalanche of profit-taking. By noon, the morning's gains had vanished and the Dow was lower than Wednesday's close by 90 points.

Even a positive report from the Labor Department that initial unemployment claims fell by 16,000 failed to stop the selling. And investors seemed to completely ignore the positive Chicago PMI reading for September - 60.4 where 56 was expected.

Despite the profit-taking, September turned out to not only be a winner but the best September in 71 years, with a gain of 7.7% for the Dow. The Dow is now up 3.6% for the year.

But problems remain and the weakness in some European economies surfaced again yesterday. Moody's Investors Service downgraded Spain's credit rating, and the Central Bank of Ireland continued to wrestle with its troubled banking sector. Shares of Allied Irish Banks, plc (NYSE: AIB ), which must raise an additional $4.09 billion, fell 13%.

The materials stocks fell as investors became increasingly concerned about China's currency policy. The sector does a major portion of its business with China, and legislation that targets China could make it more difficult for multinational companies to do business with the centrally controlled nation. As a result CF Industries Holdings, Inc. (NYSE: CF ) fell 3.9% and Weyerhaeuser Company (NYSE: WY ) was off 2.3%.

The U.S. dollar fell versus the euro, with the euro closing at $1.3634, up from $1.3629. The 10-year Treasury note fell, pushing its yield up to 2.519%.

At the close, the Dow Jones Industrial Average lost 47 points to 10,788, the S&P 500 was off 4 points to 1,141, and the Nasdaq was down 8 points to 2,369.

The NYSE traded 1.3 billion shares and the Nasdaq crossed 741 million shares. Advancers and decliners were almost unchanged with a slight advantage to the decliners.

November crude oil closed at $79.97 a barrel, up $2.11, and the Energy Select Sector SPDR (NYSE: XLE) closed at $56.06, up 2 cents.

December gold fell 70 cents to $1,307.80 an ounce on profit-taking following many consecutive days of new highs. And the PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 1.98 points to 196.96.

What the Markets Are Saying

Yesterday's Daily Market Outlook covered the indicators that, along with charting features and trend analysis, guide my technical reviews. I bring a review of the internal and sentiment indicators to our readers' attention weekly, comparing the raw data from external sources before reaching a conclusion.

At the time of yesterday's writing, one piece of important data was not yet available - the American Association of Individual Investor (AAII) Sentiment Survey. The AAII Sentiment Survey, like the Investors Intelligence, is a reverse or "contra" indicator - i.e., bullish is bad, bearish is good. Those numbers were since made available and show a small drop in the number of bulls to 42.5%. The AAI points out that this is the fourth consecutive week that bullish sentiment has been above its historical average of 39%.

These numbers are in accord with the Investors Intelligence report of yesterday in which advisers were reported to have increased their bullishness for four consecutive weeks. These reports are not good news for those who are anticipating a breakout of major proportions.

And the bulls are not going to like the result of yesterday's sloppy tape action either. Volume picked up about 0.3 billion more shares than on up days, which lately have been less than 1 billion shares on the NYSE.

The bears will cheer the numbers and also the daily reversal that triggered a sell signal from our internal indicator, the Collins-Bollinger Reversal (CBR). This is the first reversal for the Industrials while in the current price range, but it is the second CBR sell for the S&P 500. The first occurred on Sept. 23, at a close of 1,139, just two points less than yesterday's close. Multiple reversals that are close in price and accompanied by higher volume are clear signs that all is not well for the bulls.

Conclusion: The secular bear market is still with us, and the recent reversals are clear signals that investors should sell on rallies while traders should pursue bearish strategies on the short side of the market.

Has this strategy worked in the past? Our regular readers know that until mid-April, the Daily Market Outlook was bullish, but as our indicators rose to oversold heights and reversals in the major indices began to appear, I moved to a "cautiously bullish stance" in late April, and by May 3, I became downright bearish.

Just before that, I began to change our outlook with a "sell in May" piece on April 19, which read, "And so, with internal and sentiment indicators telling us that the market is now dangerously overbought and the 'sell in May and go away' strategy having triggered a sell, it is time to go to cash on all rallies. It doesn't get much better than this, so it will most likely get worse."

On Monday, I'll review the "sell in May and go away" strategy in more depth. Many of you will be surprised by my conclusion.

For a bearish trading idea, see my Trade of the Day .

Today's Trading Landscape

There are no significant earnings to be reported today.

Economic reports due: motor vehicle sales (the consensus expects 8.6 million), personal income and outlays (the consensus expects 0.3% for personal income, 0.4% for consumer spending, and 0.1% for the core PCE price index), consumer sentiment (the consensus expects 67), ISM manufacturing Index (the consensus expects 54.5), and construction spending (the consensus expects -0.4%).

If you have questions or comments for Sam Collins, please e-mail him at .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
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Sam Collins

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