High Flyers Have Lost Their Wings

My focus list, which is mostly comprised of momentum stocks, looked ugly today. Not only was there a lot of red, but many stocks have broken major support levels. Because of this, I cannot play a bounce in these stocks. I never play bounces when support has broken. Many of my favorites have now made it to my short term shorts list.

For example, LFC, BHP, FXI, AAPL, RIMM, DE, RIO, FLR, VMW, FCX, DRYS and many others now look like short candidates on a near term bounce towards old support levels. Only a few stocks are on my long list. These stocks are mostly recent breakouts that are still acting strong, such as DCO and HMSY.

Looking at today’s sector action, the bottom performing sectors have been the darlings of the market the past few months (and in some cases, much longer). Industrial Metals, Gold, Silver, Copper, Tech, Ag, Chemicals, Energy, Industrials, they all got hit hard. What does that mean? There are two theories. The first is we had our capitulation move and can expect a resumption of trend. The second is that now that the high flyers have also broke down, we can officially expect a bear market.

I can’t make a prediction, other than to say I am now more inclined to add a few shorts. I added a few today, and may add more if we get a weak bounce.