Dallas, TX
May 6, 2010, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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Intelligence, Market Timing, And Trading Strategy For Traders and Investors

Stock Market Situation Worsens
What's Hot Today:

U.S. stock index futures have been weakening as the morning has progressed. The Euro continues to slip, slide, and stumble. It was trading below 1.28 to the dollar in pre-U.S. action.

News For Thought

Goldman corporate bonds signal investor concerns about firm. According to Bloomberg: "Goldman Sachs Group Inc. bond yields show the firm’s credit is more hazardous than Citigroup Inc.’s for the first time since February 2009 as speculation grows legal and regulatory risks will depress its revenue. Debt from the most profitable Wall Street firm yielded 2.73 percentage points more than Treasuries on average as of May 4, according to Bank of America Merrill Lynch indexes. That compares with a spread of 2.29 percentage points for Citigroup, which got a $45 billion bailout in 2008 and repaid $20 billion in December. At the end of March, Citigroup spreads were 0.45 percentage point wider than Goldman Sachs’s."

Chinese stocks hit eight month lows. Property worries climb. According to Bloomberg: "China’s stocks plunged, driving the benchmark index to an eight-month low, on concern government measures to curb property speculation and cool inflation will hurt economic growth. China Vanke Co., the largest listed developer, fell 4.1 percent as brokerages said home prices may drop 30 percent."

Russia: Special forces rescue hijacked ship crew. According to AP: "Russian special forces rappelled onto a disabled oil tanker taken over by Somali pirates and freed 23 Russian sailors early Thursday, the commander of the EU Naval Force said. Ten pirates were arrested and one was killed. The raid on the Liberian-flagged ship Moscow University came 24 hours after pirates had taken the ship over and the crew locked itself in a safe room. The vessel is carrying 86,000 tons of crude oil worth about $50 million."

Stock Market Situation Worsens
Technical Indicators Suggest More Pain May Lie Ahead
The case for an intermediate term market top in U.S. stocks continued to build on Wednesday as the S & P 500 closed below its 50-day moving average. Beyond the S & P and the widely watched technology and financial sector, though, losses are starting to mount.



Chart Courtesy of StockCharts.com


We start with a look at the Nasdaq Composite, a broader look at the technology and small cap sector, which also includes a fairly good weighing of smaller bank and financial company shares. This index is off over 5% since it topped on April 26th. What's more telling is the 6.35% drop in the small stock bellwether, the Russell 2000 over the same period. This suggests that investors are losing faith in the small stocks even faster than they are losing it on the Nasdaq. More important is the fact that these were the two leading indexes for the year.



Chart Courtesy of StockCharts.com


Our frequent look at the NYSE advance decline line (NYAD) is an even better picture of the rapid deterioration of the broad market. This indicator failed to make a new high on three different occassions lately and has now plunged below its early April levels. One or two more days will make it even harder to argue against the potential for even broader market deterioration.



Chart Courtesy of StockCharts.com


The housing sector (HGX) was flying high on better sales figures. Homebuilders interviewed on CNBC have been very upbeat lately. But much of the rebound may be due to the new home buyer's credit, which has now expired. As the glut of existing and foreclosed homes grows due to mortgage resets and rising defaults, without the government support, this sector looks ready to fold.



Chart Courtesy of StockCharts.com


Finally, we look at energy. The Oil Index (XOI) has also taken a beating. Rising supplies of crude oil, and the potential for some kind of economic slowing are starting to be talked about. That means that we should start considering the potential for falling gasoline demand and lower oil company profits.

What makes the fall in XOI most compelling is that the index is now testing its 200-day moving average. A break below this key support area would likely lead to further losses and put the sector technically in a bear market.

Conclusion

The stock market is sending a clear message, sellers are gaining the upper hand rapidly. The swift deterioration of small stocks and the technology sector is only part of the problem.

This is becoming a broad market selloff and could start spreading. Global stocks are not being spared either, as China and European shares have also been tumbling.

We have added more short selling ETFs to our portfolios.

Know when to sell and how to make money when the market falls. Get a detailed trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.

 

Market Moves - Stock Of The Day
Ultrashort Oil & Gas ETF (NYSE: DUG) Makes Sense As Oil Stocks Test Key Support
The Ultrashort Ultrashort Oil & Gas ETF (NYSE: DUG) may come in handy if oil stocks slip into a bear market.



Chart Courtesy of StockCharts.com


The widely followed Oil Index (XOI) is testing its 200-day moving average near the 1050 area. The index has dropped 7.3% since topping out on April 26th. DUG has risen 13.7% over the same period.

This is an excellent correlation, and one that is leveraged as DUG moves twice as much as XOI. That makes it both lucrative and higher risk, which means that investors who use DUG have to be monitoring their investment in the ETF closely.

But here's the bottom line. If you own oil stocks, and you're not sure whether you want to sell them at this point, it makes sense to consider shares or option strategies on DUG for protection. Option strategies at this point would involve buying calls on DUG, since it's a fund whose shares rise when oil stocks fall.

DUG has been featured in our energy section since February.

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