Late Friday, it looked like the market would suffer another loss until buyers (or traders who were covering shorts) salvaged the day with a 25-minute rally. But despite Friday's small gain, the week was the worst in memory for the Dow, as it fell 6.2%. The S&P 500 was off 7% and the Nasdaq dropped 6.1% for the week.Despite the extremely oversold internal indicators, the stock market shows no indication of having made a bottom.
The Dow is down more than 40% in the past six months and is still falling -- making this the worst six-month period on record. And in the past three weeks, despite the financial press' cheerleading, every rally has turned into a one- or two-day short-covering run that ends in new lows.
But there are some bright spots.
One is the American Association of Individual Investors (AAII) Sentiment Survey. This is a "contra" indicator, meaning that the stronger the bearish reading, the greater the likelihood of a meaningful rally. Last week, for the first time ever, the AAII bearish sentiment exceeded 70%. And as noted, our internal indicators are extremely sold out.
But with the CBOE Volatility Index (VIX) showing no sign of the extreme volatility of last October and November, and other sentiment indicators neutral, my view is that the current sell-off will continue. Thus, all rallies seem doomed to fail, and our strategy is to buy into the Ultra Exchange-Traded Funds and other contra funds to ride that bear down.
As I've noted before, gold has been one play that has held up in this market and technical indicators for Yamana Gold (NYSE: AUY), my trade of the day, are signaling a possible move higher.
Sam Collins is a contributor to OptionsZone.com.
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