Don't Be Complacent

Unless the internal market statistics change for the better, investors may want to consider taking profits, Helene Meisler says.
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It's not the news, but the market's reaction to the news, that's important. It's all a matter of where the market is when the news hits. And right now, the market is vulnerable. That's just one of the reasons the higher-than-expected

Employment Cost Index

took the market down yesterday.

In late June, when the


raised rates, the market had spent the prior month preparing for the rise in rates. This explains the bullish market reaction. However, at this point in time, the best thing I can say about the market is that it is oversold. And as I explained one week ago, just being oversold is not a reason enough to buy.

The market is currently oversold. In fact, it is the most oversold it has been since last October's low. The same way an overbought reading in the market can stay overbought for extended periods of time, an oversold market can get more oversold, which is exactly what happened on Thursday. We can (and should) rally from this deeply oversold condition, but it's the intermediate-term indicators that are at issue here.

As I've been harping on all week, the number of stocks at new 52-week lows continues to expand, and that is simply not bullish. It is interesting to note that the best reading we had during the recent rally in the number of stocks making new highs was 169. That says that when the market was at its highs and things were great, 169 stocks were keeping up with the market. A rather poor reading when you consider that there are over 3,000 stocks on the

New York Stock Exchange

. Yesterday, we had 166 stocks making new lows. That's nearly the same number that were making new highs just two weeks ago, and yet we're only 6% off the highs. Imagine what that number will be if the


drops another 400 points!

The extreme selling pressure we saw on the NYSE yesterday was not as evident on the


. But don't be lured in by that. That is short-term stuff. We are nearing the end of the month, and portfolio managers own all those highflying technology stocks. For the most part, those stocks are up on the month, and if you were a portfolio manager who had to show your performance to clients, you would be reluctant to sell your winners -- in fact, you'd likely want to mark them up at month's end. The winners are always the last to be sold.

The chart which depicts Nasdaq's action relative to the Dow tells us there's more to come on the downside. You can even see how typically we've gone through a period of "basing," where the two averages sort of duke it out as to which is going to come out ahead. We have not yet gotten to another point of basing yet, according to this chart.

And if we take our eyes off the big three averages for just a minute, we can see that the

Dow Jones Utility Average

has broken a short-term uptrend line as well as its June lows. Oh sure, maybe it was


(DUK) - Get Report

buying the Brazilian utility company, but then why did all the other stocks go down, too? Throughout May, the utes were telling us all was OK. But since the market made its low in late June, the utes have been telling us all is not OK. Even the

New York Finance Index

has broken its uptrend line dating all the way back to its October low. These interest-rate-sensitive stocks are leading indicators, not laggards. We should not ignore their action.

So what will it take to make it OK to buy stocks again? All these indicators need to halt their slides, flatten out and curl back up. That takes time, so we cannot expect this market to turn itself around overnight.

In the meantime, there are some charts which seem to be sold out and OK to buy.

Procter & Gamble's

(PG) - Get Report

earnings report helped it rally yesterday, providing a level of support below. I've been recommending


(K) - Get Report

for a couple of weeks now, and it too had a good earnings report. Kellogg actually broke a longstanding downtrend line on the news, which is positive. This stock has much further to go. Also in the food group,

General Mills

(GIS) - Get Report

has developed quite a nice base. Buy these stocks on dips.

On the negative side,

Eastman Kodak


broke a trend line this week and will likely continue to fall.

Philip Morris

(MO) - Get Report

is still not a good chart despite all that support below.


(S) - Get Report

is also on my negative list. Be careful about

United Technologies


-- its chart is quite similar to the DJUA chart which just broke.

Outside the DJIA,

Chase Manhattan's


action is awful. It broke an uptrend line but has not yet broken that 80 level significantly.

Merrill Lynch


continues to drag down.


(DAL) - Get Report

failed at resistance.

J.C. Penney

(JCP) - Get Report

is also hanging by a thread here.

Many technology stocks held higher than their Monday lows in yesterday's selloff (but so did the Nasdaq). With the market being as oversold as it is and the end of the month upon us, I think this holding is temporary. This type of action looks more like complacency to me. Unless the internal market statistics change for the better, any oversold rally in these stocks should be seen as an opportunity to take a profit.

Author's Note: I am leaving for vacation on Tuesday, so I will write on Monday, Aug. 2, instead of Tuesday. After that, the next column will be Wednesday, Aug. 18.

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at