Yesterday’s action caused me to do something I rarely ever do - I looked at charts during the middle of a week. Last night I ripped through all 1,411 UP signals to get a feel for the market. As you can imagine, spending 3 hours is not as thorough research as I do over the weekend. But, I found a few things that are worth sharing.

Of the 1411 UP signals, I am concerned about 642 of them. I reviewed the performance statistics on this subset and found that they are entirely consistent with what you will find looking at the ANALYZE - PERFORMANCE section. 67% were winning signals with average gains of 30% over 24 weeks while the losers had average losses of 9% over 10 weeks. Given the extremity of the market action, I was expecting some aberrational figures but am pleased to see the consistency in my performance. My point here is that this selloff is not particularly different than what I have seen over the 3 years I have been doing Hedgefolios.

Prior to yesterday, most of the experts’ chatter suggested that this was all about commodity stocks that were going through a normal correction. They may have been the first to get sold, but yesterday was extremely broad based with no bias towards size, style or sector characteristics. More importantly, the charts on the commodity stocks do not concern me as much as the others do. For what it’s worth, I think the bulls who say “this was just a normal pullback in the metals and there is a good probability they will return to previous levels” are probably correct. On the other hand, the other stocks are much more likely to get DOWN signals this week. As I mentioned in recent posts, I held back on about 500 stocks that had been experiencing weakening technicals for the past several weeks and for the most part, these are the same ones that showed up this week. Shoulda, Woulda, Coulda…. but what I am saying here is that the vast majority of the selloff is coming from a diverse set of stocks and I doubt that they will bounce back until they have gone through a normally-shaped decline and leveling off. That takes weeks, not days.

I spent a lot of time looking at the stocks that either did well or didn’t do so poorly this week. In light of the fears of increased interest rates caused by the CPI data, I was struck by the number of small and mid cap regional banks and REITS that did reasonably well. I have no idea what this means, but the newspaper stocks also looked encouraging to me - maybe people like to read about stock declines. Other than a general sense of the expected move towards defensive stocks, I didn’t see any other sectors to highlight.

The futures are indicating a positive open this morning, but to be honest, they really don’t mean much to me. In a future post, I’ll have to write about my opinion of the usefulness or lack thereof in looking at futures. Regardless, I suspect that we will not go straight down as much as we have gone straight up. It is remarkable for me to hear financial advisors on CNBC who don’t hesitate to suggest that it’s immediately time to get back in. Even though I don’t feel it, I guess there are some that will always be willing to try the “buy the dip” mentality to get back to the good old days of early last week. Wow - was it that long ago?!?!?

For my part, I will be waiting to see a decline in selling pressure first. Then we can start talking about increased buying power. If we get a decent up day today, it will have to be close to 200 points for me to believe that the psychology is shifting back to bullish. Other than that, I expect to see more two steps back and one step forward. This market is still hanging on but a little more weakening and it will be much worse than what we have seen over the last 5 trading days. Good luck with your portfolio decisions.