Bearish Sentiment Creates Buying Opportunity

Many market bears have prematurely proclaimed the end of the bull market in the past, so MoneyShow’s Tom Aspray uses technical analysis to point out some reasons why the current decline may more likely be a buying opportunity.

The further collapse in crude oil prices Monday hammered stock prices and the selling has continued early Tuesday. The drop below $50 in the March crude oil contract has been accompanied by a sharp decline in the open interest as margin calls likely forced traders to sell their longs. Crude could complete a short-term low in the next week.

The market internals were solidly negative and the Dow Transports lost 2.66% versus a 1.83% drop in the S&P 500. Though the short-term momentum is negative, there are several reasons to view the current decline as a buying opportunity.

The four day slide has caused many of the market bears to come out of hibernation with morning headlines like “A bear market in stocks just became more likely.” Some of this new bearishness is tied to the apparent failure of the Santa Claus rally.

Of course, basing an investment or trading strategy on how the market performs over a seven-day period is hard for me to fathom. I have always stressed that buying or selling based on historical or seasonal tendencies, when the technical studies are not confirming, is a prescription for disaster.

Many of the current market bears have proclaimed the end of the bull market in the past years as the bull market has moved higher despite the prevailing skepticism. This unfortunately has kept many investors out of the market during this bull market.