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The "perfect storm" is an overused cliche', but we noticed
yesterday that as news of swelling seas from Hurricane Alex stopped the
Gulf oil leak cleanup effort, the selling on Wall Street picked up steam,
and never really let up. That, to us, is a bad sign for the way this market
is behaving and what could lie ahead, barring some sort of small miracle.
On June 9th, 2010, in this space, we penned a piece titled “Smells Like A Bear
Market?” Since then, much has happened. For one thing, the market tried to make
this analyst look foolish by forming a textbook “W” bottom in the S & P 500
index, and sucking in a whole lot of hopeful investors. We looked upon the rally,
as a potential positive reversal, as long as the S & P 500 could cross above
its 200-day moving average convincingly.
On June 16th, in this space we noted: “The mainstream media is gushing about
the 200 day moving average, but the real story should be the completion of the
“W” bottom on the S&P 500. For a couple of weeks, we have noted that the
S&P 500 was rounding out a “W” bottom. It looks as if that “W” was completed
on June 15. That means the burden of proof has shifted toward the bears. If they
can overwhelm the buyers, the bears will likely win a significant victory. At
this point, we rate the odds of such a victory as no better than 50-50.”
Since then, the “W” bottom in the S & P 500 has fallen apart, and the market
looks headed for new lows, as traders seem focused on the potential for more
economic problems in Europe, and those problems spreading throughout the world.
The issue was complicated further by two well know economists. One is the bearish
Nouriel Rubini, whose nearly permanent call for a double dip recession got some
notice after the G-20 agreed on austerity measures going forward. The other is
Nobel Prize winning economist and New York Times columnist Paul Krugman who wrote
that we may be in the early stages of a Depression, earlier this week.
Chart Courtesy of StockCharts.com
The market's technicals have deteriorated significantly. The Nasdaq's Advance
decline line (NAAD) has been in a down trend for several weeks, despite the recent
rally attempt. That's a very negative divergence.
Chart Courtesy of StockCharts.com
And when you add the fact that the number of stocks making new highs on the Nasdaq
has also rolled over, you can see that the market has lost both momentum and
breadth, making rallies more difficult, and likely to fail, as the recent rally
proved.
Chart Courtesy of StockCharts.com
What’s happened is that important guys who’ve gotten it right before, are getting
some airplay, just at the time when the G-20 may be making a mistake by choosing
an “all fits one” solution to the current global economic problems, while the
stock market was in the midst of a technical failure, as the S & P ran into
heavy selling at the 200-day moving average, much as we suggested that it could
given the mainstream media’s ability to ruin a good indicator.
And as we noted here yesterday when Paul Krugman notes: "tens of millions of
unemployed workers, many of whom will go jobless for years, and some of whom
will never work again," people are listening, especially if they see that their
own job may be in danger. This changes the psychology of Main Street, and Wall
Street. People who might have wanted to take a few risks, start to pull back
their horns, and start to focus on just keeping what they've got. If enough people
have the same type of behavior, it starts to spread, and you get a vicious cycle.
Conclusion
We seem to have arrived at one of those proverbial moments of truth in human
behavior, when the optimists can't get enough traction and the pessimists, and
the realists are gaining the upper hand. Bad policy, today's as well as that
put forth by past administrations and congresses is starting to catch up with
people's psyche.
The hope that usually buoys America is starting to wane. It's not our job to
figure out if what we're noting is right, wrong, correct, or incorrect. It's
just happening. You can see it everywhere. And now it's made the connection between
the real world and Wall Street.
So, the bottom line, is that just as Hurricane Alex has shaken up the Gulf oil
spill recovery, so has a perfect storm seemed to have hit the stock market, as
the technicals and the fundamentals seem to have aligned in a negative fashion
at the same time.
There is only one thing to do.. Brace yourselves for impact.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
a detailed trading plan in your pocket. Read Dr. Duarte's All
NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Shares of the
S & P SPDR ETF (NYSE: SPY) closed Tuesday just above
the fault line between new lows and key support.
Chart Courtesy of StockCharts.com
The "W" bottom formed by the S & P 500 (SPX) is now
gone. The best the bulls can hope for is a triple bottom
and maybe a trading range between 1040 and 1130 for the
next few weeks.
And if that happens, swing traders may have a nice opportunity to ply their wares.
Otherwise, if the S & P closes below 1040, and does so in convincing fashion,
we could be testing the 1020 area or maybe even 1000 on SPX.
A lot could happen to reverse that. But the question is where is it going to
come from? Is Washington going to extend the Bush tax cuts? Not likely. Is Congress
going to rejigger the way that it appropriates money away from a welfare state
to one in which people that work are rewarded? Not in this lifetime.
And is Europe going to like working 40 hours per week, and retire a few years
later? Hah! What about the return of old values such as an honest wage for an
honest day's work? Again, the answer is no.
What's our point? Unless behavior changes radically at the upper levels of global
governments and powerful institutions, we're stuck here for a good while. At
least until November, but likely beyond that as well, as gridlock may return,
but in this case proves to be useless since something drastic needs to change.
Pimco's "new normal" starts to look a lot like Krugman's "Third Depression" and
Roubini's "Double Dip." Call us bearish, because we are. Yet, this is one time
when we'd love to be oh so wrong.
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