Both the Dow and the Transportation Averages are testing previous resistance levels. This is quite an Interesting development. If your favorite stocks were down today for no fundamental reasons, picking up another tranche if you didn't get to already is a good idea.
Hey - we could be wrong and stocks could fall further, but the mechanics of the Dow/Trans relationship are pointing to limited sustained downside risk at this point. A sharp sell-off? Very possible! Are we in a new bear market now? No. Are we approaching a new bear market? No. Could things suddenly change? Yes. This is why, as Scott Pluscahu so often reminds us, risk management is THE most important aspect of trading - and we'll add, investing.
So to help manage risk, we would advise seeking out only the highest quality companies in a few different economic sectors: commodities, utilities, consumer goods, manufacturing and financials. Incidentally, our latest recommendation, Silver Wheaton, is considered a misc financial company - so you technically can get two birds with one stone here. It gives us low risk exposure to the precious metals sector (silver in particular) with good upside potential, and it's business model allows the company to capture streams of cash much like a bank does when they lend out money.
Overall, the downside risks grows weaker and weaker each day and week the Dow fails to fall below support levels. Maybe it will be QE3 or Money printing or whatever ... or maybe something is already happening right now behind the scenes, causing stocks not to tank ... who knows! The point is, the Dow/Transportation relationship is our temperature gauge. Right now, the reading is warm.
