Officially a Bear Market, Now Where’s the Bottom?

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 2

Recent discussion has revolved around whether this is a bear market or not.   Well, I think that debate can officially be put to rest now.  This is a bear market and has been for at least a couple weeks after the major indices broke key long term trendlines.  Of course, now the debate turns to "Are We At a Bottom?" following the massive capitulation early last week following the emergency Fed rate cut.  That isn’t such an easy question to answer, but we can remind ourselves of some of the characteristics of a bottom.

First of all a bottom is a process, often a long one following the kind of severe technical damage we’ve seen over the past few week.  Bottoms typically occur once everyone quits talking about when it will happen and we are a long ways off from that.  We are no doubt in the early stages of a bottom forming process that will take months to sort out. 

Significant rallies can occur in a bear market.  The spike in fear as measured by the VIX this week and subsequent capitulation sets us up for some kind of a rally over the coming weeks, but I think buying into long term positions is a mistake.  It just provides "trading" opportunities on the long side.  It’s important to shift focus from a predominant core strategy of adding to winning long positions on the dips to a strategy of initiating shorts on any bumps up (in addition to locking in short term long trade profits).  If you don’t have a successful short strategy you better be preserving cash and limiting your trading to just "dabbling" on the long side. 

I personally am being cautious on the long side until I see further evidence of some stability in the market (ie. light volume selling) followed by some follow through buying by the institutions.  I never like to see big reversals off the highs like we saw on Friday, but the volume came in much lighter than in previous days.  That’s a start, but this market is still too dangerous to get aggressive with.  Given that the Fed decision is on Wednesday and the tendency for the market to whipsaw in the days following, I may just hold off on aggressive trading until the following week.  The bottom line for most people is to keep sitting on your cash until the dust settles a bit. 

It’s a BARE market.  There is absolutely no leadership right now and very little opportunity on the long side which can be seen in my watch lists.  I maintain a top shorts and top longs watch list that I update every single day and watch in real time during the trading day.  Months ago there were nearly 3 great long opportunities for every short.  That has reversed and now I’m seeing 2 great short opportunities for every long.  You have to take what the market gives you.  While the market remains oversold and potentially bottoming over the intermediate term, the short side is going to be the place to be over the next several months.  Until I begin to see a flurry of new leaders breaking out of healthy bases, we aren’t at a bottom.  It’s as simple as that. 

 ::: Model Portfolio :::

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::: Best/Worst Performers :::

– Top 10 Performing Industries For the Week –

1. Residential Construction: 28.75%
2. Surety & Title Insurance: 27.05%
3. Banks – SE Region: 18.25%
4. Savings & Loans: 15.15%
5. Banks – Mid Atlantic: 14.00%
6. Auto Dealerships: 13.90%
7. Toy & Hobby Stores:  12.85%
8. Apparel Clothing: 12.65%
9. Home Furnishing Stores: 11.90%
10. Sporting Goods Stores: 11.90%

– Top 10 Worst Performing Industries For the Week –

1. Diagnostic Substances 13.15%
2. Personal Computers: -12.65%
3. Heavy Construction: -9.50%
4. Health Care Plans: -8.10%
5. Drug Manufacturers – Major: -7.45%
6. Specialized Health Services: -6.80%
7. Water Utilities: -6.45%
8. Medical Equipment Wholesale: -6.45%
9. Drug Manufacturers – Other: -6.00%
10. Drugs – Generic: 5.85%

– Top 5 Best Performing ETFs For the Week –
 
1. Ishares Homebuilders (ITB)
21.00%
2. SPDR Homebuilders (XHB) 18.70%
3. KBW Regional Banking  (KRE) 10.40%
4. KBW Bank (KBE) 9.45%
5. HLDRS Regional Banks (RKH) 9.25%

– Worst 5 Performing ETF’s –

1. SPDR Biotech (XBI) -8.65%
2. PowerShares Dynamic Biotech (PBE)
-8.25%
3. Ishares Health Care (IHF)  -7.90%
4. HLDRS Pharma (PPH)
  -7.40%
5.
Ishares Germany (EWG)  -7.20%

:::  IPO’s Worth Watching for This Week :::

This section will now appear as a separate post on Mondays.

While 2008 should be a much slower year for IPO’s considering the deterioration of the market, there will continue to be some good companies coming to market here and there.  I’ll be highlighting the best IPO’s every Monday.

::: Upcoming Economic Reports (1/28/2008– 2/1/2008) :::

Monday:         New Home Sales
Tuesday:       Durable Orders, Consumer Confidence
Wednesday:  GDP, Fed Rate Decision
Thursday:      Personal Income/Spending, PCE Inflation, Initial Claims, Chicago PMI, Crude Inventories
Friday:            Auto / Truck Sales, Nonfarm Payrolls, Construction Spending, ISM Index

::: Earnings I’m Watching This Week :::

Monday:
Chattem (CHTT), American Express (AXP), VMWare (VMW)

Tuesday:
CyberSource (CYBS), 3M (MMM), Centex Homes (CTX), Emc Corp (EMC), OptionsExpress (OXPS), Yahoo (YHOO)

Wednesday:
Covance (CVD), Altria Group (MO), Amazon (AMZN), Pulte Homes (PHM), Starbucks (SBUX), Boeing (BA), United Parcel (UPS)

Thursday:
Intuitive Surgical (ISRG), Green Mountain Coffee (GMCR), Google (GOOG), Dolby Laboratories (DLB), Monster Worldwide (MNST), Cameron Intl (CAM), Nasdaq (NDAQ), Hologic (HOLX), Mastercard (MA), Abaxis (ABAX)

Friday:
NYMEX Holdings (NMX), MF Global (MF), Exxon Mobile (XOM)

::: In Case You Missed It – SelfInvestors Blog Entries of the Past Week :::

1. Subprime Mortage Meltdown on 60 Minutes

2. Portfolio Update: Hello I Have Losses

3. Rick Santelli Calls Out Cramer

4. Upcoming IPO’s – RMG, HOO & IPCM

5.
Fed to the Rescue, Capitulation Day But BE PATIENT

6. ETF Trends & Observations: Gold, Oil, Banks, India, China & More

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Comments on Officially a Bear Market, Now Where’s the Bottom? »

January 28, 2008

tmstute @ 5:36 pm

Like my investors/traders, I am looking for new resources to assist me navigate these difficult times. I am 61, retired and spend most mornings watching/listening and reading info for my next trade. I like what I see on your site with one somewhat major reservation. I have never used shorts in my trading; more out of ‘fear’ and ignorance, but that’s it.
Your strategy, understandably as noted above, uses short trades to good advantage. How much of a handicap will I be at if restricted to long positions only?
Thx, Tom

January 29, 2008

Tate Dwinnell @ 7:09 pm

Hi Tom,

It won’t be too much of a handicap but will limit your arsenal of tools a bit, particularly in this kind of market. If restricting yourself to the long side the best course of strategy would be to be careful right now and wait for new leadership to emerge. As mentioned above there are very few good opportunities on the long side right now. It’s a real crap shoot right now.

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