Is it Time to Dust Off Your Bear Suit?

• Posted by Robert Sinn
• on July 27th, 2011

We can thank our elected representatives in our nation’s capitol for today’s 2%+ across the board equity market drubbing. Has the situation become serious enough to become bearish and look to sell short this market?

Plainly stated, today’s sell-off was ugly. A 90%+ down day on above average volume which sliced through several key support levels and moving averages. The MACD crossed over, the RSI is heading lower and the upward sloping 200-day SMA is the natural downside target. Remember, the 200-day held on a couple occasions during the June swoon – Normally moving averages don’t serve as exact support/resistance levels, however,  the bulls will defend the 200-day because it means so much for the overall health of the market.

 

$IWM- The Russell 2000 continues to prove itself to be a prescient leading indicator of the trend of the overall equity markets. Today’s 3% massacre sliced through some key support levels with the 200-day SMA sitting just below at 79.15 I expect the bulls to make a stand very soon. Major support comes into play in the 77 area.

 

$IYT has not closed below its 200-day SMA since last August. This is yet another key market sector which faces a crucial test over the coming days.

 

$ARK- Many closed-end bond funds (CEFs) sold off aggressively today, most of these funds are primarily invested in investment grade US corporate debt. They trade between 150,000-300,000 shares on an average day and often trade at discounts to their net asset value (NAV). More often than not, I have found these CEFs to be a contrarian indicator for overall market stress. In other words when these funds sell-off it may be near the end of a market correction, not the beginning.

 

 

$LQD- The largest investment grade corporate bond ETF remains in a strong uptrend above its 20 & 50-day SMAs. I place much more credibility in a $14 billion ETF which trades around its NAV as opposed to much smaller, less liquid CEFs which regularly trade at discounts and are largely held by retail investors.

I am neutral here (which could change at any moment) after selling most of my long positions into last week’s rally. Today’s market action is cause for concern but it is not time to dust off the bear suit just yet.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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