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  • Beware the Vacuum as New Leaders Emerge

    By Rev Shark
    RealMoney.com Contributor
    3/8/2006 9:02 AM EST

     
    "A truth that's told with bad intent beats all the lies you can invent."

    -- William Blake

    The major indices yesterday misled us about the overall quality of the action. The truth was hidden -- and it wasn't very pretty. Momentum favorites like as those that comprise the IBD 100 were down 2.3%, the Philly Semiconductor Index fell nearly 3%, and small-caps were down around 1.5%. Because the popular press focuses on the DJIA, which finished in the green yesterday, the poor price action and breadth was effectively concealed from the masses.

    Understanding the truth about the market is a good first step, but we still have to figure out what it means and decide what action to take. The very clear underperformance of certain sectors of the market while others were untouched suggests some sort of rotation into new leadership. Commodity, oil and metal stocks have fallen sharply but no other group has stepped up to replace them. Technology looked like the most likely candidate but it has been unable to gain any real traction, and retailers and biotechnology have been unable to establish uptrends.

    Financials showed some leadership aspirations yesterday and there was clear outperformance of big-caps over small-caps. Those are possible themes that may develop but it is still too early to have a high level of confidence. Over on Street Insight, Doug Kass suggestions that rotation into new leadership is often accompanied by market corrections. That makes sense because transitions simply don't run smoothly. We simply can't expect new groups to step into a leadership role just as the old leaders lose their footing. Change is always difficult and the stock market is no exception.

    So what do we do at this point? We become more cautious and play defense. If you have been using a lot of margin you may want to cut back and consider raising cash. It is always a good time to be unforgiving with the weak stocks in your portfolio if they aren't holding up and you are holding them more out of hope than promise. Then use those stock sales as a source of cash.

    Be particularly careful if you play the averaging down game. In a poor market stocks can fall a lot faster and further than you think and it's quite easy to find yourself out of capital as your favorite stocks continue to trend downward.

    I don't want to sound totally negative at this point. There continues to be a pretty good amount of positive technical setups in individual stocks but if you are going to buy them you will need to use some effective trading tactics to ensure you don't let a bad trade turn into an investment if the market doesn't cooperate.

    Google is once again causing some pain for its stockholders while once again causing confession over its revenue projections. Goldman Sachs has cut its estimate on the stock to $490 and it is trading down over $10 in the premarket. Management is obviously not inspiring confidence.

    Overseas markets were weak with the prospect of higher interest rates in Japan causing problems. Oil and gold are both down. We have our work cut out for us so strap on that trading helmet and be ready to go to work.

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