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Thursday, August 16, 2007

Markets recover - is it time to celebrate yet?

Yesterday's post reviewed the situation on the charts of the major averages and came to the conclusion that there was a good chance we would see another leg down in the current correction.

For a while today it looked like we were going to see that decline immediately but at the last minute, the averages turned up and reduced their losses and in the case of the S&P 500 actually finished with a small gain.

The most significant development of the day was the resurgence of the financials. ETFs like XLF racked up 3% gains and REIT ETFs like IYR managed a 2.5% gain.

Still, I'm not sure this is a time to breath a sigh of relief. We have seen over the previous few weeks similar behavior where the averages would close with a flurry of buying that seemed to save the day. During this time numerous observers pointed out that the advance/decline numbers were troubling at best. The end result of this kind of market activity has been what we see now: the averages at or below their 200-day moving averages and most, if not all, of year-to-date gains evaporated.

Today was similar. The A/D numbers were dismal. On the NYSE, decliners were almost double the advancers. On the NASDAQ, it was more mixed but decliners outnumbered advancers by about 20%. On the AMEX there almost three times more decliners than advancers. These kinds of numbers don't generate much optimism.

Looking at New Highs/New Lows is also an unhappy exercise. There were literally only a few new highs on any of the exchanges but over a thousand new lows on the NYSE and over 300 new lows on both the NASDAQ and AMEX.

With these kinds of numbers it seems unlikely we will see the bull market resume any time soon. This is not to say we won't see some rallies but I expect we will see several weeks of volatility before a clear up-trend is established. Conversely, I suspect it is too late to take new positions in the inverse ETFs QID, SSO or DDM. Hopefully, readers have raised some cash that can be deployed when the next trend is revealed.

As for the financials, since there were no major changes in market conditions that would affect these stocks one way or the other, this rally is probably just a reaction to the feeling they were over-sold.

Dislcosure: author owns shares of QID

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