Editor’s Note: Are US stocks due for a rally? Don’t count on it, says Rick Pendergraft. More bearish movement is likely. Take steps to protect yourself.

Today saw a few small increases in the market, as record oil and steel prices boosted commodity producers.

Bloomberg reports that the Standard & Poor’s 500 Index rose 7.98 points, or 0.6 percent, to 1,286.36, paring its June retreat to 8.1 percent. The Dow Jones Industrial Average added 57.16, or 0.5 percent, to 11,403.67. The Nasdaq Composite Index increased 4.88, or 0.2 percent, to 2,320.51.

Financial shares continued their three-day slump on worries banks and bond insurers are running out of cash. Citigroup (NYSE:C), Merrill Lynch (NYSE:MER), Lehman Brothers (NYSE:LEH) and JPMorgan Chase (NYSE:JPM) are all down today. Shares in Goldman Sachs (NYSE:GS), however, rose in morning trade by just 0.50%.

As If Things Weren’t Bad Enough, Bearish Crossover Sign Of More To Come

Rick Pendergraft

The pullback continues. Last week’s selling has caused a clear crossover of two moving averages that signals more downside is likely.

The S&P 500 has dropped sharply throughout the month of June and this has resulted in the 10-month moving average crossing bearishly below the 20-month moving average. This type of crossover doesn’t happen all that often, as you can see in the chart below.

The last time the bearish crossover happened was in March 2001. Sure, the S&P had already dropped 400 points from its high, but it dropped another 400 points over the following year and a half. So we could have a long way to go before we see an end to the bear market.

I will caution that we are likely to see rallies like we saw in the spring of ‘01 and fall of ’01. In fact, I look for one in the near future, given the number of stocks that are oversold after the last two weeks of selling. In fact, I ran a scan of stocks in the Nasdaq 100 and S&P 500 to see how many of them were oversold based on a 14-unit slow stochastic below the 30 level.

The results were astounding. In the NDX, 75 of the 100 met the criteria and in the S&P, 357 met this requirement. Just for kicks, I ran the opposite scan as well, stocks in the two indices that had slow stochastic readings above 70. There were a whopping total of four in the NDX and 26 in the SPX. These are incredibly one-sided ratios and suggest a bounce is due. But don’t get caught up in the bounce and think that the bear market is over.

If you haven’t heeded the warning yet, you should take steps to preserve capital. If you use options, look at buying some long-term puts on ETFs like the Spyders, Diamonds (DIA), or QQQQ. If you are averse to using options, look at some of the double inverse ETFs that are out there. Here is a quick list:

ProShares Ultrashort QQQQ-QID
ProShares Ultrashort Dow 30- DXD
ProShares Ultrashort S&P 500- SDS
ProShares Ultrashort Russell 2000- TWM
ProShares Ultrashort Semiconductors- SSG
ProShares Ultrashort Financials- SKF
ProShares Ultrashort Basic Materials- SMN
ProShares Ultrashort Technology- REW

These funds will rise in value as the associated ETF falls, and these ETFs are leveraged so the move is double the down move. In other words, if the QQQQ falls one percent, the QID will rise by two percent.

Now is not the time to sit idly by, now is the time to protect your assets.

Good luck and good trading,
Rick

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: Subscribers to Rick’s KISS Investing service recently closed out gains of approximately 150% on Continental Airlines and 175% on the Diamonds Trust. Click here to learn more about KISS Investing]

Source: As If Things Weren’t Bad Enough, Bearish Crossover Sign Of More To Come