Danger, Will Robinson! 10-6-05

Good Morning.

All overseas markets were down big, especially the Nikkei which was down around -2.5%. This was on the back of the large negative continuation of the down move in U.S. Markets yesterday. Oil has been trading lower and has breached key support level of $62/barrel. Breadth was awful yesterday and volume was very heavy.

Jobless Claims came in higher than expected this morning at 390k versus the 350k expectations which is keeping the fear of stagflation alive. Of course all the jaw-boning that the Federal Reserve Governors have been doing about inflation being at the high end of the range is not helping matters. No doubt about it, some real selling action is taking place in the stock market.

The Volatility Index (VIX) has been pushing higher indicating complacency is fading. When it starts to get more jumpy, perhaps near the 15 range we would be able to declare that fear is ruling the roost. We're just not there yet. Furthermore, although the investor intelligence polls are showing a decline in Bullishness we have more room to fall before we can exclaim that sentiment is too Bearish.

The S&P 500 has breached its 1200 (the simple MA) thanks largely to the significant weakness in energy related shares. Technicians will be watching for another close below 1200 before they start chatting about further downside in the S&P. In Tech Land the Semiconductors are finally starting to find gravity which is further ruining the speculative juices.

Although the NASDAQ has just retested 2095 and has done a quick bounce, there are too many negatives floating around to capture our buying interest. Sure, many traders will claim that the market has done a double bottom and a successful retest, especially if the market has a strong close this afternoon. In fact, should that event occur, the market would attempt to suck in more buyers and perhaps rally 1% - 2%. However, it is too uncertain at the moment to determine if that is likely to occur. Indeed even if it did occur, the 1% - 2% upside does not offer a good risk/reward ratio if you are wrong.

Our downside target for the NASDAQ remains around 2077 as we outlined in prior posts. We are comfortable with our Bearish 18% long exposure and will use any strength above 2120 to put out more shorts.

We recently wrote about the Pop and Drop scenario and that is what the market is experiencing. Don't be in a rush to time the bottom of the drop.

Defense!

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