Reversal Day?

Top Line: We missed a little on our call for the day on Tuesday with the Dow dropping hard in the morning and the NASDAQ dropping below last Friday's low. But, then the market turned around and finished up on the day. The NDX rallied nearly 1.5% after being down over 1%. Now we see what happens next. We think at least a pause in the decline has arrived. June was brutal and there are several bears out there who now, all of a sudden, think that the market will go down. Where were they in May?

We wanted to make another comment on the Jackson plus a couple from our last post. There comes a time in the life of an investor when you have been watching a stock or fund for a long time and you get to know that investment as well as anyone. You know the right time to buy and, more importantly, you know the time that you Should sell. This is where things get tough and greed sets in. You think it can go higher but alas you miss your opporunity. Then you tell yourself if it only comes back to where it was, Then you will sell.

The easiest thing to do is buy, but selling is tough. Selling high is tough because you always think you can get more for it...this is greed and has no place in your disciplined trading strategy. So, what you do is watch it go down and down and down some more until you think it will go to zero so you sell it. By the way, some stocks do go to zero.

Anyway back to the Jackson plus a couple bucks...AIG has fallen out of bed over the past year due to several factors. Unfortunately, this is a difficult situation from a trading perspective because the price hasn't been this low in a long time, more than ten years ago. With prices dropping like this on some major bellweather stocks like AIG and GM, you can easily push your thinking that the entire economy might experience something fairly bad.

If you think you want to buy one of those two stocks, you have to ask yourself what your risk tolerance level is. The largest percentage moves occur in the final stages of a down move. What that means is that if you buy a stock that has already dropped quite a bit, you have a great chance to lose a large percentage of you principal.

We advocate caution for the next couple of months until the market finds a more lasting bottom. AIG may have found its bottom but you don't know that until you see a bounce and then a retest of the last low. Then you can make a better guess as to whether you think the stock can move back up. In the mean time you don't want to try to "catch the falling knife".

The question has kind of spurred us to take a bit longer view of the market. We thought we would start by saying that the True Contrarian has issued another post today which is interesting reading. We subscribe to his daily service which is well thought out and calm. His analysis suggests that this is an election year which will lead to its own movements but that 2009 may be when the real bear shows up in the stock market.

And, thanks to CM for providing some additional info on SBUX. Starbucks (SBUX) said they would be closing and additional 500 corporate owned stores on top of the 100 they had originally planned. This is out of about 7000 stores. CM recalled our discussion on the company, saying that SBUX would be a good indicator of the state of the consumer and how willing they are to forgo their latte. As a side note, after their announcement the stock went up...of course.

FSI: 88.01 (big rally on the back of strong gains in three out of four components)

Oh, yeah, one more pic...