Steer Clear of Major Trades for Now

Stock markets have declined in four of the last five sessions, including a 143-point decline on Thursday. Rising fears of a recession in the United States are driving the bearish climate. The big concern is that a slowdown here could have a domino effect and spread to the global economies. Japanese markets fell on this concern and China, while still growing impressively, has downgraded its GDP growth for 2008.

The weak investor sentiment is reflected in the new-high/new-low (NHNL) ratio, a simple measure of the number of stocks touching a new 52-week high versus the number of stocks that have declined to new 52-week lows. Markets are bearish when fewer new highs are made and the NHNL ratio will tend to decline, thereby giving you a warning. This is what we are seeing at this juncture and it has been a warning for some time now.

On the big board, the NHNL on the New York Stock Exchange (NYSE) continues to be largely neutral and a warning flag, with readings below the bullish 70% level. After an extended period of bearish sub-20% readings, investor sentiment on the NYSE has improved over the last several weeks, but there have only been two readings above the bullish 70% level since November 1, 2007, and this is not supportive of any sustainable market gains until we see improvement with investor sentiment.

On the technology front, we are seeing a similar situation, as the NHNL ratio on the NASDAQ has also seen some improvement, but there has not seen a bullish reading since October 11, 2007, over four months back. Investor sentiment towards the technology sector has been bearish 70% of the time, going back nearly seven weeks, and the near-term trend is down. Again, don’t expect to see improvement in technology unless investor sentiment improves and buying materializes.

My advice to you now is to hang tight and avoid making any major trades unless you have a stomach for risk and the possibility of losing major capital.