Not Wise to Join the Current Sell-Off

Tuesday, October 7th, 2008
By George Leong, B.Comm. for Profit Confidential

Black Monday appeared again, as the DOW fell as much as 800 points but recovered, and closed down 370 points or 3.58% on the day, breaking below key psychological support at 10,000. Across the board, selling was panicked, as investors flocked to the exits, dumping stocks. The focus of the selling was technology and small-cap growth stocks, as worries about a global meltdown and recession drove the selling. The fact that the trading volume of 3.4 billion shares on the NASDAQ was well above the 200-day moving average indicated the seriousness of the sellers.

The degree and scope of the selling yesterday were a surprise given that stocks had been moving down for three straight days and were extremely oversold. Yet it is clear that investors are very worried about the condition of the U.S. and global financial systems, despite the passage of the $700-billion financial bailout legislation and concerted efforts worldwide to halt the credit crisis.

Simply nasty it was, but it could be much worse, as the key Russian MICEX exchange closed down 18.6% on Monday in an absolutely crazy day; in fact, the exchange was forced to shut down its trading three times during the trading day. Kind of reminds us of years passed in U.S. exchanges before the establishment of breakers to avoid what we saw during Black Monday in October 1987.

Selling in the technology sector has been intense, as the NASDAQ is close to 30% this year, and just fell below 1,900. The DOW down 25%, while the S&P is approaching support at 1,000, down 28%. Small-cap stocks, which had been holding and were close to breakeven just a month ago, are trending lower on the economic woes, as the Russell 2000 is down over 22%. Simply, all across the board, the selling capitulation has surfaced, and is reminding us of the technology meltdown in 2000.

So, where do we go from here? Investors and Americans are clearly negative. In a CNN/Opinion Research Corp. poll, about 60% of Americans thought that an economic depression was likely.

The uncertainties out there are valid and make more downside moves in stocks likely in the near term and heading into 2009, which is turning out to be full of uncertainty. We are clearly nervous, as a market bottom has yet to be established and this is where the risk is. You’ve got to wonder about the current selling capitulation and the increasingly attractive valuation of stocks. At the same time, buying stocks with attractive valuation is still risky due to the downside risk.

We feel the current chaos in the market and in selling is somewhat irrational, as investors are dumping positions and stop-loss limits are being executed for both retail and institutional investors.

We do not advise selling positions during the current sell-off, as we could see an oversold bounce coming up yet; if you are concerned, we hope you have stops in place. The problem is that setting close

stops could take you out of many positions because of the current volatility. Set a stop that you feel comfortable with. At the end of the day, prudence and caution will be key, not greed.

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Tags: dow jones, market sell-off, Small-cap stock, Stock Market Analysis

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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.