Although we are not
usually in the habit of commenting on daily or even weekly moves in the stock
market, today's activity bears some inspection.
Typically, towards
the end of a correction, inexperienced investors panic and assume that, as stock
prices are declining now, so shall they continue to decline indefinitely.
As panic sets in, these investors dump stocks regardless of
fundamentals, volume runs high, decliners beat advancers 6:1 or worse, and
short-sellers pile on. At a certain point, however, which we call a
"reversal day," some investors conclude that stock prices have gotten
ridiculously cheap and step in to buy. As soon as some cash starts to flow
back into the market, short-sellers rush to cover their positions, which adds to
the buying pressure. The market closes out the day at breakeven or
better. If stock prices rally for an additional 2-3 days, the bearish
psychology gets broken, and new buyers enter the market, setting off another
bull cycle.
Today looked a lot
like a reversal day. At 2PM, the Dow was down 167 points (-1.67%,) the
S&P 500 was down 19.1 points (-1.75%) and the NASDAQ was down 52.6 points
(-2.72%). Two hours later, the Dow and S&P 500 closed up 0.3% and 0.2%
respectively, while the NASDAQ narrowed its loss to just 0.3%.
Advance/Declines shifted from 1 up for 3 down to more stocks up than down by
day's end. Since the stock market peaked in early March this year, the
S&P 500 has been down 7 of the last 11 weeks. To close up this week
and next would be very constructive.
Yours sincerely,
David Edwards, President
Heron Capital Management, Inc.
(800) 99-HERON http://www.HeronCapital.com
The Heron Capital Management client letter is published immediately following quarter end and 1 or 2 additional times per quarter. The views expressed in this letter represent HCMI opinion and strategy as of the date published and can change at any time upon receipt of new information. Data quoted in this letter are from sources deemed reliable, but no guarantee of such data is implied.