Beware of Dead Cats
Research for Online Investors

by John Dalt

6/8/11

Since the first of the month, the market has been down every day.  Six in a row, if today finishes the way it has started.  We expect the market to bounce higher somewhere as nothing goes in a straight line.  This phenomenon even has a name, a “Dead Cat Bounce” as in even a dead cat will bounce when falling.  You may also hear the term “reflex rally.” Think of the market as a rubber band, when it gets stretched moving lower, the reflex is to pull back.

Just like a yo-yo, after pulling back, then it heads lower for the “loop-T-loop.  Here is a chart of the S&P 500

We broke through support at 1300 on June 3.  This now becomes resistance if the market tries to bounce back higher in a “reflex rally.”  Don’t be sucked into thinking that all is well in the world and happy days are here again.  Our next strong support doesn’t come until the horizontal line at 1251.  This corresponds to the low the market hit on 3/16.

Many old timers like to check a Point and Finger chart.  These charts date back before the advent of computing ability to analyze the market.  I include it here because I find them useful in many cases.  The simplicity of the chart takes much of the ‘clutter’ out, and presents a clear reading of the past performance.

The 1250 level shows up as support again here, as we can clearly see the market reversal in March.  We can also see the extended bull climb that occurred from August 2010 through February 2011, in conjunction with QE2.

Since we have broken through support at the 1300 level, now is not a time to be anxious when it comes to putting money to work.  Rather we should look to sell into rallies and relax to wait for the market to tell us when it has put in a bottom.  Then, we can get greedy.

The month of June seems devoid of market making news, as we wait on earnings season to start again.  This scares me a little.  Without knowing where the good news comes from, there is a big void for bad news to fill.  We are never short of negative things happening, so the market could be in for some “tough sledding.”

Mailbag:
Thanks for the empire article.  Felt this way for years.... every empire dies…like an alcoholic, empires won't admit they are over the hill until almost all is lost.  What didn’t you agree with in the article?----subscriber R.T.

John’s reply:  I felt it was written from a British perspective that does not recognize free markets and capitalism.  Of course, I wonder if our government does anymore either.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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