The current market climate is extremely bearish, with weak relative strength and bearish investor sentiment. Investors are increasingly nervous about ...
The current market climate is extremely bearish,
with weak relative strength and bearish investor sentiment. Investors are increasingly nervous about the direction of the global economies and the chaos has extended into trading, as there is no positive news to talk about. This is a market in which the downside risk continues to be high, so those with little capital should stay out.
On Monday, the DOW fell for the 10th time in 12 sessions and, in the process, broke below two decade lows to below 7,000, as it continues to search for a valid bottom. Small-cap stocks continue to trade down with the economy, as the Russell 2000 fell over five percent on Monday, and is down 27% in two months, making it the worst performer of the major stock indices.
As I watch all of this selling unfold, I'm not surprised. For those of you who have followed my columns, you know I have been bearish on the market for well over a year. In my "Market Forecast for 2008" written in January 2008, I commented that "as we move forward, we expect to hear of more impacts driven by the fragile state of the subprime market and increased credit concerns in the banking system." This clearly has played out and has been destructive for the stock markets.
There is little reason for stocks to advance higher, other than oversold conditions in this extreme bear market. The investment climate is what I view as reckless, with extremely bad news not only in the U.S., but also worldwide. India just downgraded its GDP growth, while China and the European are on edge. The EU is meeting and looking at a multi-hundred-billion-dollar bailout package. I continue to be negative. The key now is for some stability to return to the markets and for some sort of base to form. Without a valid bottom, the downside risk is high and could discourage investors.
For those of you who are "buy and hold" investors, this type of strategy does not work, and has not in years. For instance, General Electric Co. (NYSE/GE) reduced its dividend on Monday, aiming to economize $9.0 billion annually, which was expected given that the company has $524 billion in debt. I do not believe this is an isolated case, as I'm seeing more dividend cuts. I fully expect to see more dividend cuts given the slowing. I advise you to be extremely careful about buying companies with high dividend yields, as they may not be sustainable and the yields are high because the price has declined.
The current technical picture is bearish. Be extremely careful if you are looking at entering long positions. Technically, investor sentiment continues to be extremely bearish and this will hinder the sustainability of any upside move in stocks. At this point, about 9.03% of all U.S. stocks are above the 200-day moving average versus 13.12% a month ago. For the market sentiment to improve, we need to see the moving averages trending higher.
At this point, you may want to stay on the sidelines and wait to see how things unfold before jumping into the markets and risking more of your trading capital. Cash is king at this time.
Profit Confidential
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