Monday, May 19, 2008


one great difficulty of the market is that when investors are feeling the most optimistic and excited, the chances for a quick reversal increase. that is exactly what happened today. this morning, buyers were chasing already extended stocks into the stratosphere, and the biggest worry was that maybe you are underinvested.

if one is a disciplined investor, one probably wasn't chasing this strength, but if one was holding some of the recent highflyers, like drys, pot or fslr, one suffered a sharp swing from profit to loss. a disciplined approach would have helped keep the damage from becoming too severe, but it's a good reminder why chasing an extended market is a risky proposition.

typically, these sort of severe intraday reversals are regarded as a sign of top, and an indication that more downside lies ahead. given the degree to which some of the charts have gone parabolic recently, (for those that believe), there is an awfully lot of profits to protect, and i would suspect some more selling lies ahead.

on the other hand, a lot of folks were distrustful and missed out on this move, so there is likely to be some inclination toward dip buying. whether it will be powerful enough to overcome the profit-taking is the big issue. eventually, i'm looking for the sellers to take control, but the dip buyers are going to put up a good battle at first, and will only give up after they are turned back a couple times.

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