INFLATION FEARS CAUSE HEAVY MAY SELLING -- A LOT OF SELL SIGNALS ARE BEING GIVEN -- ONE WAY TO BENEFIT FROM FALLING MARKET IS TO BUY OTC BEAR FUND
THIS IS LOGICAL SPOT FOR THE MARKET TO PEAK ... I've been writing a lot lately about the inflationary implications of the falling dollar, rising commodity prices, and rising interest rates. I've also been showing a number of negative divergences in market breadth indicators. It looks like all of those bearish influences finally hit the stock market this week. A couple of bearish reports released today didn't help. Consumer confidence fell to a seven-month low and import prices rose to the highest level in seven months. The latter number just intensified fears of rising inflation. And we're in the month of May which is traditionally the start of the weakest six months of the year. From a seasonal standpoint, this would be a logical time to expect some serious market selling. That's also true from a charting standpoint. The last time I showed the S&P 500 monthly bars in Chart 1, I pointed out that the market benchmark had reached a potential resistance barrier along its early 2001 peak at 1315. That's a logical spot to expect some topping action. And that's exactly what we're getting.
Chart 1
S&P WEEKLY CHART ON SELL SIGNAL ... Chart 2 applies some technical indicators to the weekly S&P chart. Most of them are turning negative. The 12-week Rate of Change (ROC) line peaked in January and has been dropping since then. It's on the verge of falling beneath its zero line which is a sell signal. The weekly MACD histogram has turned negative for the second time in the last month. This sell signal looks like the real thing. The weekly Bollinger Bands show the S&P threatening its 20-week moving average (dashed line) which has acted as support since last November. The fact that the last two days of selling have come on heavy volume greatly increases the odds that the 20-week line will be broken. There are other factors that also suggest that the current downturn is more serious than others over the last six months.
Chart 2
SMALL CAPS ARE FALLING THIS TIME ... The S&P Large Cap Index has fallen beneath its 50-day moving average again. Normally I would take that as an initial sell signal. The problem is the S&P broke its 50-day line three times earlier this year (see circles). And each time it turned back up again. What's different this time? This time small caps are breaking down as well. Chart 4 shows that today's close beneath the 50-day average by the S&P 600 Small Cap Index is the first one since early November. It bounced off that support line in February, March, and April (see arrows). In my view, that makes this week's downturn more serious that anything we've seen in the last six months. Needless to say, short-term indicators have turned negative on virtually all of the major market indexes. A more serious sell signal would be given by an S&P 500 close beneath its mid-April low at 1280. The Nasdaq market has already broken that support level.
Chart 3
Chart 4
NASDAQ BEARS DOWN ON 200-DAY LINE ... The Nasdaq market has suffered the most selling this week and is in the most danger. The next chart shows the Nasdaq Composite Index having already broken its April low and bearing down on its 200-day average and first quarter lows. [The Nasdaq 100 has already broken its 200-day line]. As I suggested yesterday, the plunging relative strength line is a negative sign both for the Nasdaq and the rest of the market. Next week will bring a very important test for both markets. Unfortunately, the Nasdaq weekly chart isn't encouraging. Chart 6 shows that the 9-week RSI line has fallen below zero (a sign of weakness) for the first time in six months. And the weekly MACD lines are on a sell signal. There's another reason why a test of the first quarter lows will be important. Chart 6 also shows a rising trendline drawn under its 2005 reaction lows. It looks like it's going to tested as well.
Chart 5
Chart 6
SHORT QQQQS OR BUY PROFUNDS SHORT OTC FUND... It looks more and more like the Wall Street axiom to "sell in May and go away" is good advice this year. The combination of bearish intermarket influences, negative chart action, and an unfriendly season pattern are just too much for the market at this point. There aren't a lot of safe havens in the market. Although I'm still a long-term bull on commodity markets, this week's selling in energy and precious metal shares suggests that even those markets are over-extended. Conservative investors might consider moving some money out of stocks and into a money market fund. Aggressive traders can try to make money on a falling market. Since the Nasdaq 100 is the weakest part of the market right now, that's where I'd be looking. There are two ways to do that. One is to short the Nasdaq 100 Shares (QQQQ). A short sale makes money when a market falls. Chart 7 shows the QQQQ closing under its 200-day line and threatening its first quarter low. There's an easier way to accomplish the same task. And that's to buy the Profunds Short OTC Fund (SOPIX). Chart 8 shows that inverse fund closing over its moving average on Thursday. The only other inverse fund to do that is the Profunds Ultra Short OTC Fund (USPIX). That more aggressive fund doubles the return on a falling QQQQ. But it's also more risky. Take your choice.
Chart 7
Chart 8
