The Day Bear Rules The Stock Market

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Jan 26 2007
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U.S. stocks fell sharply on Thursday as a drop in oil prices hit shares of energy companies, including Exxon Mobil Corp. (NYSE: XOM, stock), and investors tried to lock in profits (including me, of course) a day after the Dow Jones industrial average hit an all-time high. Even gains in some technology companies such as eBay Inc. (Nasdaq: EBAY, stock) and QUALCOMM Inc. (Nasdaq: QCOM, stock) failed to offset broader weakness. Declining shares beat advancing shares by a ratio of about 3 to 1 on the NYSE, and on the Nasdaq, by about 7 to 3.

Investors were basically nervous about corporate earnings growth, which is expected to slow in the fourth quarter, after more than four years of double-digit gains. For example, Microsoft Corp. (Nasdaq: MSFT, stock) fell 2.1 percent as investors sold the software maker’s stock even before its quarterly earnings report. But the stock turned around (rose 1.8 percent to $31.00) after the close as the software maker posted quarterly earnings that topped Wall Street’s estimates, driven by sales of database software and its Xbox 360 game console. Microsoft also raised its full-year profit target.
I guess there’re too many bad news on one day. A report showed sales of existing homes took their biggest tumble in 17 years in 2006, and bond yields jumped to their highest level since August after a five-year Treasury note auction attracted only lukewarm interest. Higher bond yields can signal higher borrowing costs for companies – a trend that worries stock investors because higher rates can dampen corporate profits.
The blue-chip Dow average and the S&P 500 suffered their steepest one-day percentage declines since late November 2006. If you can’t remember that particular sell-off day, you can read it again here which affect other stock markets the next day, including Malaysia stock market.
Bear Rules the Day – The Dow Jones industrial average dropped 119.21 points, or 0.94 percent, to end at 12,502.56. The Standard & Poor’s 500 Index slid 16.23 points, or 1.13 percent, to finish at 1,423.90. The Nasdaq Composite Index fell 32.04 points, or 1.30 percent, to close at 2,434.24. If you look at the data-chart, Russell 2000, Semiconductor and Dow Transport also drop by one percentage. This is a sign of bear creating havoc to the market with sentiments changed over-night.
The point and figure data which map out the relationship between supply (created by sellers) and demand (created by buyers) at different price levels shows market is entering the “High Risk Area” of 70% level. At current level of 68%, index fund managers would start tightening stop loss points on all holdings and sell all laggards stocks (weak relative strength). Index fund investors’ strategy at this moment will be the switching from stock to call options to limit equity exposure.
Investor optimism soared to its highest level since 2004, reaching 103 for the month of January 2007. This is a jump of 13 points from last month’s level of 90 and only the fifth time the Index has been above 100 since December 2000. Generally investors began the New Year 2007 with a bullish outlook for the stock market. On the other hand investor sentiment continues to suggest that residential real estate market conditions continue to deteriorate with two in three investors believe so. With such a high optimism, there’s only one way to go when other market data shows bearish trend and that is – downwards.
The stock market needs good news to continue the bull-run – maybe an interest rate cut by our dear Ben Bernanke will do the trick.

# TIP: Stay sideline if the current bearish stock market makes you nervous. If you are bullish on a particular stock but want to limit your exposure, consider trading Call Options instead. Your risk is lower by following index fund managers’ strategy.

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