Stock Market Gives It Up.....

By: Jack_Steiman

In a big way. This was inevitable. The market couldn't stay up as it was forever based on the degree of froth it was dealing with on a daily basis for many, many months. Actually since late February. Froth can take a market higher than anyone thinks possible, but it is amazing how fast the carnage can come. How fast things actually fall. Months of upside can be wiped out in days or weeks. The grind to the upside seemingly never happened when you look at how fast those grinding gains are wiped out. This is how corrections and bear markets work. They are very intense. They create tremendous emotion. Fear ramps very quickly.

Markets have a way of fooling everyone, because froth gets to a point when the complacency is locked in. The market can never fall attitude. No worries. All is fine. Every dip is bought and so on. The masses rush in at the top and get smoked Let's face it folks, the froth in some of these stocks is simply off the charts, so now the market will correct them, because the rubber band of complacency has snapped. It won't be straight down. There will be lots of rallies along the way. Massively oversold rallies. News rallies. Fed rallies but the market has a shot at a very deep correction here. The 1700's on the S&P 500 are very doable, and if we can get there that would ring out all the froth we've been dealing with as of late. When markets snap, your best friend is patience and cash. Just the reality of things folks. If you don't have patience you'll likely suffer some terrible losses needlessly.

Let's discuss froth and the journey it has been on for the past eight months. The bull began and things moved up slowly with regards to froth. No one truly believed the market could rise very much given the global situation economically, but with the Fed on its side the market kept rising, and folks were getting anxious not being in for the ride higher. Slowly, but quite surely, more and more folks turned bullish and with the Fed promising low rates basically forever, it finally sunk in that every pullback was being bought because the Fed was not allowing folks to put their money anywhere else.

Naturally this created more and more belief in the bull until things got euphoric. A bull-bear reading on a ridiculous 46.4%. Bears down to 13%. Unheard of readings of froth and complacency. The froth reaches the stage of being full for the bulls, and then it all starts to fall apart. And it can fall apart quite rapidly. In time the cycle completely reverses and there will be far too many bears and the spread will go from its peak of 46.4% down to 10% or lower. Wash, rinse and repeat. The spread should now be well below 30% for the first time in those eight months. My guess in the mid 20's when we get the new reading next Wednesday. We shall see, but, for sure, things are calming down quickly on the froth front.

So where do we go from here you ask?

Well, we are getting extremely oversold, and we're testing the 200-day exponential moving average at 1900 on the S&P 500. One would expect a rally of some type off such a key moving average, especially since it hasn't been tested in what seems like forever. It has been years since a full test, so I would think we'll get a bounce here, but you cannot be sure about it since we are unwinding such intense froth. I remind you that the froth we have just dealt with was historical, thus, there's no way to judge if we'll bounce where we normally would expect things. This is a very dangerous market for the short term. A few months of this correction will make things much better for the bulls. My suggestion is easy does it for those few months either way.

Bear market, or markets, in a correction can have huge snap back rallies. Dow up 200-300 points in a day is normal. Be careful in these tough times. I do expect much lower readings in the weeks and months to come overall. Be smart, and be patient, as much as humanly possible, but as I always like to say, do what feels right to you.

Have a nice weekend!

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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