Market Retest: Pass of Fail?

It seems like just last week we had freed ourselves from the bear’s stranglehold. Well, actually, it was just last week that we witnessed one of the best rallies in years.

We had an aggressive Fed slashing and burning both the federal funds rate and the discount rate faster than anytime in history, and we saw coordinated efforts by bankers around the globe to try and keep the world’s financial engine humming on all cylinders.

But alas, the exuberance we saw last week was wiped out in one day with a huge Super Tuesday market drubbing. On that day, Wall Street handed the Bear Party a decisive victory over the Bull Party, with a landslide 370-point decline on the Dow, a mammoth 44-point drop for the S&P 500 and a massive 73-point NASDAQ whipping.

My friend, the bear isn’t in hibernation yet, and those who tempt him are sure to suffer the consequences.

The way I see it, the market is now in the process of retesting its recent lows, and this test is going to be pass or fail.

On the domestic front, the key support level on the SPDRs (SPY) is $131. On the international front, the key support level for the iShares MSCI EAFE Index (EFA) is $69.25 (see the charts above).

If these support levels are violated, the market will fail its retest. If, however, we manage to bounce off these levels and hold above them, we’ll have passed the market retest and maybe, just maybe, we can start seeing a silver lining in the current batch of bearish clouds.

Regardless of what happens with this retest, if you have yet to make any changes to your asset allocation, my only question is why not?

I have been warning you for months now about the risks inherent in this market, and we have been discussing the need to get defensive with your hard-earned investment capital.

Now it is really time to stop being paralyzed with inaction and start getting with the program — before you too get a failing grade!