Wednesday, March 28, 2007

Look out below ... again

Isn't it great that I was able to recycle the graphics so soon? The Dow dropped something like 90 pts as soon as Ben opened his mouth today. As always, what he said cannot be less important, it's always the market reaction that matters. On Mar 21, my exact words were "I'm standing aside to let the bulls exhaust themselves". That moment, I think, has come.

Let's look at XLF, the ETF for the financials. It rallied up to the 50 dma and promptly fell over. Meanwhile, the momentum indicators are decidedly pointing south. The cause proximate is of course the subprime contagion, but as I have said repeatedly on this blog, the weakness will be far-reaching. The financials are just one of the weaker sectors. Similar behavior can be seen in most major indices that dropped below their 50 dma over the last couple of days. Technically, the fact that this rally is fading so quickly should be of great concern to bulls.

I picked up leap puts in XLF and XLY between yesterday and today. I also hold a couple of other short positions. Best of luck and be safe!