Market Machinations

By seadmin

Soaring then diving, jumping then dipping. That’s about the best way to describe this market over the past week or so. Just last Thursday the Dow eclipsed the 14,000 mark, setting yet another record high in a recent bevy of new all-time highs.

All of that changed on Tuesday when we witnessed the Dow crumble 226 points for its worst one-day point and percentage loss since March. The big culprit that took stocks down was the warning from mortgage lender, Countrywide Financial, which said that the subprime mortgage woes are now spreading beyond just the subprime sector (more on housing shortly).

Tuesday’s knock back in the major averages has now pushed stocks down to about where they were trading in mid-May. That’s about eight weeks of virtually no real upside, despite a string of record-setting Dow and S&P 500 performances.

What this tells me is that this rally is getting real tired. Try as it may, the market is having a tough time sustaining the value that it held just two months ago, and that speaks volumes for the future of this bull’s health.

In the above chart of the S&P 500 SPDR (SPY), we see that despite the numerous highs, stocks have still not sustained the level that they were at since May. I think that the real key support level here on SPY is $149. If we break below this support level, there is a good chance SPY will continue declining below its 200-day moving average (red line).

Another way to measure the potential future decline in this market is to look at small-cap stocks. Below we have a chart of the Russell 2000 iShares (IWM), and ETF which measure the small-cap stock segment of the market.

As you can see, IWM just plunged below its short-term 50-day moving average (blue line) and is now on its way toward its longer-term 200-day moving average. Small-cap issues have been amongst the leading segments in this bull market, and if this slide in small-cap equities continues, it could mean a lot more trouble ahead for stocks.

My advice to anyone holding stocks right now is to be very, very careful. Make sure you have your stop losses set on all your holdings so that you can protect your gains and so that you don’t see your winning evaporate into the ether.

Remember that when it comes to investing, protecting profits and protecting principal should be two of your biggest priorities.

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