Overhead Resistance Too Strong for the Market

Aug 9, 2007: 8:42 PM CST

All major US Indexes fell precipitously today, with the Dow, S&P, and Russell falling close to 3% in one day, while the Nasdaq fell 2%. As indicated yesterday, there were at least three sources of overhead resistance that the market – or buyers – had to overcome to lift the major indexes. As today’s action shows, they clearly failed.

While the magnitude of the decline may have been shocking to some, I’m starting to believe large point swings in the market are becoming rather commonplace. While some traders are loving this surge in volatility, it is my guess that the majority – including many large funds – do not revel in it.

The S&P suffered a large volatility decline that was halted by the 200 period moving average:

Despite the decline, the market sits at support currently… whether or not it will hold will be determined tomorrow. Wounded buyers may step up, but sellers mauled recent gains fought over two and a half days.

Depressingly, all major SPDRs (sectors) were down today over 2%, with the only exception being found in consumer staples. The financial sector took the brunt of the punishment by traders and large firms today, falling 3.6%.

Is it particularly important why the consumer staples sector fell the least today? From both a sector rotation and a logical standpoint, big funds and position traders who must be invested (long) in the market at all times must put their money to work where their investment dollars will return the greatest relative return… and that means fleeing to the ‘safety’ of defensive sectors. Even though these stocks/sectors may decline, they will decline less than the overall market, allowing fund managers later to brag “we beat the market this year” … where beating the market means losing less money than the market did during that period of time.

As commonly noted, “One day does not a trend make.” If funds continue to move money away from ‘riskier’ sectors/stocks and into more defensive stocks, it is because they see further weakness ahead. You would be wise to heed their warnings.

The proverbial ‘red lights’ are not flashing completely yet, but I believe the ‘yellow ones’ are starting to.

Please be cautious and trade lighter if you need to until the market can get firmer feet to stand upon. Until then, be safe.

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