Market Update: Don't Get Cooked

With the Nasdaq & S&P 500 indexes down about 1% this morning - there's one image that comes to mind about the investors and stock market...

It has to do with delicious blue crabs.

When I was a kid, we moved from the urban sprawl of New Jersey to the wilderness of southwest Florida.

Our county had more cows than people. No interstate highway. No fast-food franchises. The only "mall" was hardly such - just a shared space for the local supermarket, drugstore, five-and-dime and dinky 2-screen movie theater:

You get the picture.

Anyway, we lived along the shores of beautiful Charlotte Harbor, with only a few neighbors for company.

A few of them would put out crab traps in those pristine waters - and give us newcomers an occasional cooler full of live crabs.

I'll always remember the neighbor's advice: "Don't bring your pot of water to a boil and drop the crabs in. That's cruel and they'll try to climb right out."

"The trick to cooking these guys," said the neighbor, "is to put the crabs in the pot first, then add cold water....and then slowly turn up the heat to full boil."

"By the time they realize they're in trouble...they'll be dea-....I mean...ready for dinner."

You can see why I never forgot the story (and while not the sqeamish type...not a big crab fan, either!)

Market Temperature Rising

But it makes a point - sometimes we run into bad situations that evolve slowly over time.

By the time we realize we're in trouble...it's too late to do much about it.

That's where we're at in the stock market right now, in my opinion.

Everything seems OK. The Nasdaq made a new "higher high" a few weeks ago. The other indexes haven't followed suit. But the market has held together just fine.

But after 2 weeks of sideways action, unable to make further gains - the market lost ground yesterday (Wednesday). It appears the indexes will all lose ground today as well.

And it's all happening uncomfortably similar to a chart analog (comparison) to a key moment in the bear market of 2002, which I've been telling folks to watch for in the last few weeks.

Here's what that chart looks like now, as of this morning:

As I've noted a few times now, the key similarity is this:

• These days, the Nasdaq QQQs are the only index that's been strong enough to make a new "higher high" (above the dotted red line).
• In 2002, the DJIA was the only index to make a new "higher high" as the indexes prepared for a final decline into a bear market bottom.

It's a very un-healthy situation when one index moves higher...and the other indexes cannot.

As I noted to premium subscribers yesterday, there's still time to benefit from the coming decline, or - if one chooses to keep a portfolio heavily invested - at least hedge a portion of the resulting losses.

Sometimes just taking a small action helps us avoid the panic that occurs as a bear market hits full stride.

But like the crabs in my mom's pot...the sooner we take action, the better...or else we run the danger of getting cooked.

Best of goodBUYs,

Jeff Yastine