Tuesday Market update

William O’Neil once said, “The hard-to-accept great paradox in the stock market is that what seems too high and risky to the majority usually goes higher and what seems low and cheap usually goes lower.”

This seems to be a rather astute observation as the S&P 500 index made a new 12-year closing low, as investors continue to run scared of the talk of nationalizing banks.

This just confirms why it isn’t a good idea to buy stocks just because it is cheap or low.

Case in point is General Electric, which last month closed at $12.13 and paid a 15 percent dividend and may have seemed like a real value play.

Now one month later, GE closed today at $8.85. That’s a loss of 27% in just one month as investors grow concern that GE may have to cut its dividend in order to support its GE Capital unit.

I am a firm believer that what you don’t own can’t hurt you! We are seeing the fastest reduction in dividends since 1955, so chasing dividends is a bad idea in this environment!

Technically, on a short-term basis the stock market is oversold. The daily stochastics are at %K 2 and %D at 10, suggesting we could be close to seeing some short covering. The McClellan Oscillator is approaching a low that usually generates a rebound.

This is not a good point to load up on shorts as smart as that may seem!

I want to make a very fine distinction. While we made a closing new 12-year low for the S&P 500, today did not take out the lowest lows for last year, which for the S&P 500 stands at 741.02.

That may be a bit confusing but a closing low can be different that an intra-day low. The intra-day low today was 742.37 for the S&P 500, so we did not take out 2008’s low of 741.02. Granted, we probably will take it out tomorrow as 1 point isn’t much of a cushion. The Wilshire 5000 closed today at 7,525, so it has to break below 7,340 to confirm new lows and that could also happen as early as tomorrow.

Some have pointed out that the Nasdaq Composite is showing a positive divergence, closing today at 1387.7 verses its November lows at 1295. Technology stocks have been doing better than the broad market, but not smaller companies.

Notice that the majority of OTC stocks on the advance/decline line have now broken the November lows. This illustrates how a few big cap technology names like Apple and Google can sometimes paint a false impression of strength. Most stocks that trade on the OTC are struggling.

Sectors leading the market are mining, food and healthcare --- all defensive plays. Investors are hanging out in these sectors hoping they will lose less than other sectors.

Any short term bounces should be used as selling opportunities.