Wednesday, May 4, 2011

More Downside To Come?

The selling was intense enough this morning to produce an oversold bounce around midday, but it picked up again in the final hour and the markets closed solidly in the red. Like Tuesday, intense selling in oil, precious metals, commodities and high-beta big-caps was not fully reflected in the senior indices. The S&P 500 and Dow Jones Industrial Average did weaken, but they grossly understate the damage that has been done to a whole slew of stocks.

Breadth was better than 2-to-1 negative with just semiconductors in the green, mostly due to continued strength in INTC. Other than that, and a few defensive names like PG and CL, there is no leadership in this market right now.

The big question to ponder is whether this poor action is the start of a downtrend or just some aggressive profit taking after a good run. The severity of the selling in the leadership groups looks like more than just some routine consolidation; however, this market has consistently come back very strong just when it looks like it is ready to crack.

Given the amount of technical damage that has been done to so many stocks, particularly the high momentum names, we shouldn't expect anything more than an oversold bounce at this point. Earnings season is winding down and seasonality is increasingly negative, so the bulls have fewer positive catalysts.

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