Yesterday’s action killed much of the long-side
optimism I was feeling about this market. Not only was the selling
broad-based and on high volume, but the action in leading stocks and recent
breakouts was abysmal as well. Rather than strong breakouts with good
follow-through, I’m seeing lots of whipsaw action.  Here are some examples (all
in different industries):

 

( SAFM | Quote | Chart | News | PowerRating)
(Food-Meat Products)

 

 

( PCNTF | Quote | Chart | News | PowerRating)
(Internet)

 

( ABAX | Quote | Chart | News | PowerRating)
(Medical)

 

 

( SHI | Quote | Chart | News | PowerRating)
(Chemicals)

 

 

( PAL | Quote | Chart | News | PowerRating) (Metal)

 

 

This kind of action
makes for very difficult trading. I would suggest traders play it close to the
vest until the market improves. Keep initial risk premium smaller than usual and
look to lock in partial profits a little quicker. Protecting your capital in a
difficult market is just as important as profiting in a favorable
market. Capital protection can be the most difficult part of the equation for
most traders, though.

 

This market could
begin to rally strongly at any time, but until I see it happening, and until I
stop seeing action like the above charts, I won’t be too enthusiastic about the
long side of the market. As for shorts, downside breadth is starting to
improve. To this point, though, the new lows list has been dominated by
high-yield plays (REITs, Financials, Closed-end Bond Funds, etc.)  High-yielding
securities can be more difficult to profit from, because, as a short-holder, you
are required to pay the dividend.

 

Enjoy your weekend,

 

Rob Hanna

robhanna@rcn.com