Market Commentary for Wednesday, February 23, 2005

Although there was a fair amount of chatter about "reasons" for the steep market decline on Tuesday, most of those reasons were complete red herrings.  Even absent all those reasons, the market had run out of forward momentum and was vulnerable to attack based on technical considerations, as opposed to economic or business fundamentals.  Market sentiment was negative, so traders and speculators exploited that negativity.  The facts that oil was up and the dollar down and a little re-hashed discussion of central banks diversifying their foreign exchange reserves were true, certainly didn't justify some wholesale exodus from the market.  What we saw on Tuesday was simply the snowballing effect that can occur when momentum peters out and speculators itch to reverse and bet in the other direction.  Once the market starts breaking through "support" (a technical rather than economic or business concept), traders and speculators really start to pile on with their shorts and dumping of long positions.  The recent recovery off the January low really had run out of steam (with recent mutual fund inflows rather lackluster), so speculators simply no longer had any patience to wait for more buyers to show up.

The good news was that the sharp 28.30-point Nasdaq decline on Tuesday was a solid "throw in the towel" sell-off, so it has a good chance of having purged most of the "weak hands" out of the market.

The bad news is that we broke below the intra-day low of the new up-leg that started on Friday, February 11, so we're back to square one looking for the start of a new up-leg for the advance off the January low.

Nasdaq trading volume was heavy (2.07 billion shares), and breadth was strongly negative, with 2.68 losers for each gainer.  This was a heavy sell-off.

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