Monday, October 02, 2006

A No News Drop is Bearish

The stock market didn’t know what to make of the news bites that presented themselves on Monday.  Construction spending was up with consensus being for a flat month over month number.  Pending home sales were up and the ISM Manufacturing Index fell more than expected although it was above the 50 reading that indicates growth.

Instead of focusing on the difficulty of the news, the market went about the business of “making a new high in the Dow”.  When the 11,722 level seemed to hold back the buying, not to mention that the highs were below those of last Friday, the market did an interesting thing, it fell and actually fairly hard and fast given what we have seen of late.  The Dow dropped about 60 points in the space of about 15 minutes while the NASDAQ Comp fell about 15 points in the same timeframe.

When questioned about the drop, several analysts said there was no fundamental reason for the sudden drop, no news item that presented itself to cause such a drop.  This is the difficulty of the bear, the reason people sell doesn’t have to be rational, just like the buying doesn’t have to be rational either.  We think the drop today is just an extension of the drop that started last Friday and has a ways to go.  The bulls will probably want another opportunity to “make a new high in the Dow” and that may still happen but we still don’t think that it would really matter to the technical bearish case.

Right now, the market is confused and wants to understand why that new high in the Dow doesn’t seem attainable.  Maybe they are taking it down to give it another go before we get to Friday and the jobs’ report.  We do not think the market needs to wait until then to decide what to do but it certainly has taken its time so far so we expect anything over the near term.

Drops with no news are particularly bearish and we are keenly aware of the break we saw on Monday.  These breaks by themselves are not much to think about but if they are followed by some more selling without cause, then we would start to feel the timing of a down move approaching faster.  As we have indicated for a while now, you do not want to be long when this thing hits.  There will be little time to react.

Dow Industrials:  11,670.35  -8.72  (wow)
VIX: 12.57
QQQQ:  40.14
RYVNX:   20.26
RYAIX:  23.38
RYCWX:  39.78
TLT:  89.30
BEGBX:  13.75

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