Year-to-Date Lows: Testing 1-2-3?

Last week, I suggested that the market might need a retest of its year-to-date lows before we could get the mandatory capitulation and subsequent "mad as hell" moment that ends all deep market corrections ("Stocks on a Straight Razor"). With the Friday sell-off in the markets nearing a 300-point decline in the Dow as I write, it seems as if the market might be well on its way toward making that moment actually happen.

All week in our pre-open e-mail newsletter, Morning Coffee with TradingMarkets (click here for your free subscription) we have been warning investors and traders that when you have a high number of stocks that are overextended--multiple consecutive higher highs, 2-period Relative Strength Index values soaring into the upper 90s, advances of 10% or more in a matter of days--the likelihood that a markets' rally will be corrected, and corrected sharply, increases. Although these are short-term signals, derived from TradingMarket's Short Term PowerRatings, these signals can be invaluable timing tools for investors and long-term traders looking for opportunities to buy their longer-term positions when stocks are likely to be at or near their cheapest.

The most important building blocks for a rally are higher highs and higher lows. Because higher highs and higher lows are the very essence of an uptrend, this should be of little surprise. What is interesting is that even with a nasty, week-ending sell off, both the S&P 500 and the Dow Jones Industrials have managed to remain above lows of the month (on an intraday basis). If the markets are able to maintain even current levels, if buyers step in at or near the close, then the market potentially will be well on its way toward forming the sort of higher low that will be required before the market can meaningfully advance.

And even if we have further to fall, the critical lows remain those from the second half of January, when buyers then did just what investors and traders are hoping they do now: move in late in the day to begin buying, chasing the short sellers into covering their positions and inevitably bidding the market higher again.

Down Goes the Dollar

Speaking of falling, has anyone taken a look at the dollar against most major currencies?

Full disclosure: I've spent an uncomfortable amount of time over the past year or two as a contrarian greenback bull, suggesting that both the technicals and the fundamentals pointed to a potential rally in the U.S. dollar that few believed was possible.

With the Euro topping 1.50 and the British pound closing on a 2-to1 advantage over the American dollar, there probably is not much point in me iterating the reasons for my dollar bullishness of yore. It is increasingly apparent that the asset deflation we are seeing in the mortgage lending market has yet to reach the stage where debtors are so desperate for dollars that the value of the American currency is, essentially, short-squeezed higher. Rather, based on comments by Federal Reserve Board chairman Ben Bernanke, we still appear committed to the notion that the solution to the problem created by extraordinarily accommodative monetary policy is, you guessed it, more extraordinarily accommodative monetary policy.

What needs to happen to arrest the dollar's decline? The leading candidate is the sort of global economic weakness that would encourage other central banks--such as the Bank of England, the Bank of Canada and the European Central Bank, all of which are making their policy announcements next week--to abandon their fairly consistent anti-inflation line in favor for a more American-style commitment to boosting economic growth. For better or worse, however, given the tendencies and pronouncements of Western central banks--ex the U.S. Fed--this is hardly a probably proposition.

Stocks in the News

Those stocks making financial news headlines this week included a selection from among the month's biggest gainers, a selection from the month's biggest losers, and a heavier than usual serving of stocks from the worlds of technology and telecommunications.

Congratulations go out to Yahoo! (YHOO@YHOO | Quote | Chart | News | PowerRating) among the biggest gainers for the month of February as an unsolicited bid by Microsoft (MSFT | Quote | Chart | News | PowerRating) saw Yahoo shareholders and Yahoo executives differing over the wisdom of accepting the software giants offer.

And a big raspberry for Sprint Nextel (S@S | Quote | Chart | News | PowerRating) which was among the biggest losers for the month of February. Sprint Nextel this week posted a loss of more than $29 billion and admitted that it was writing off the entire cost of its merger with Nextel.

Its days of strong growth and high profit margins increasingly behind it, Dell Computers (DELL@DELL | Quote | Chart | News | PowerRating) reported this week declining profits for the fourth quarter, worse even than analyst expectations.

Electronic Arts (ERTS@ERTS | Quote | Chart | News | PowerRating) announced an unsolicited $1.9 billion bid for rival Take-Two Interactive (TTWO@TTWO | Quote | Chart | News | PowerRating). Take-Two Interactive rejected the bid as "too low" and claimed that there were other suitors interested in the company other than Electronic Arts.

Shares of Genentech (DNA@DNA | Quote | Chart | News | PowerRating) pulled back this week after soaring higher a week ago due to news that the biotechnology company's anti-breast cancer drug, Avastin, had been approved by the FDA.

Investors sold shares of Google (GOOG@GOOG | Quote | Chart | News | PowerRating) this week as news came out that click-through for the Internet company's advertising had declined by 7% in January.

What to Look for Next Week

Monday: Construction Spending
Tuesday: Same Store Sales / Bank of Canada Announcement
Wednesday: ADP Employment Reports / Factory Orders / Fed Beige Book
Thursday: Jobless Claims / Pending Homes Sales Index / Bank of England, ECB Announcements
Friday: Consumer Credit

Best Performing Stocks (PR 8-10) of the Last Five Days

Here are some of the best performing, high Long Term PowerRatings stocks of the past five days. This week, all of the listed stocks have PowerRatings of 9 or 10.

Covance (CVD@CVD | Quote | Chart | News | PowerRating). Long Term PowerRating 10
PowerShares DB Agriculture Fund ETF (DBC@DBC | Quote | Chart | News | PowerRating). Long Term PowerRating 10
Coca Cola (KO@KO | Quote | Chart | News | PowerRating). Long Term PowerRating 9
International Flavors and Fragrances (IFF@IFF | Quote | Chart | News | PowerRating). Long Term PowerRating 9
Huntsman (HUN@HUN | Quote | Chart | News | PowerRating). Long Term PowerRating 9

Worst Performing Stocks (PR 1-3) of the Last Five Days

Here are some of the worst performing, low Long Term PowerRatings stocks of the past five days. This week, all of the listed stocks have PowerRatings of 2.

Cell Genesys Inc. (CEGE@CEGE | Quote | Chart | News | PowerRating). Long Term PowerRating 2
Under Armour (UA@UA | Quote | Chart | News | PowerRating). Long Term PowerRating 2
Crocs (CROX@CROX | Quote | Chart | News | PowerRating). Long Term PowerRating 2
Fannie Mae (FNM@FNM | Quote | Chart | News | PowerRating). Long Term PowerRating 2
UltraShort Basic Materials ProShares (SMN@SMN | Quote | Chart | News | PowerRating). Long Term PowerRating 2

David Penn is Senior Editor at PowerRatings.net.