Yesterday seemed to be an alarm bell for the bearish clan. Sheesh, give em a triple-point drop on the Dow and they all wake up screaming. I read one technical analysis this morning … well, here is the title,
BEARISH WEDGE: COULD THE DOW DROP 1000 POINTS?
I understand in theory technicians are not bears or bulls; they simply read the charts and then report what they see, but I have to ask the question, “How does this chart square with the fundamentals?” True, Europe continued its PMI decline, but China and the US Flash PMIs both came in decent. In fact, the US Flash PMI was actually more than decent – it showed broad underlying strength.
- According to the report, this month’s reading “indicates a robust improvement in overall operating conditions across the manufacturing sector. Moreover, the headline Manufacturing PMI index – which is designed to signal changes in prevailing business conditions in the U.S. manufacturing sector – held at the same level as August’s 52-month high.”
More than the above, though, the report suggested something else very positive, which might explain the market drop this morning. You know, the world according to the Fed watchers.
- The report also indicated that the job market in the manufacturing sector continues to pick up. “Increased levels of new work from both domestic and export clients contributed to a robust and accelerated pace of job creation in September. Payroll numbers rose at the fastest rate since March 2012 (and joint-strongest rise for seven years), with survey respondents citing improving demand conditions and associated efforts to boost capacity.”
Okay, so back to the wedge pattern … How does the above square with the suggestion the Dow could drop 6% in the very near term? How could one juxtapose this against the fundamentals and suggest it could happen. Easy is the answer because there are all kinds of bearish technical arguments out there that support the notion the market is due for a correction of 5% or larger.
- The most glaring divergence can be seen in the Russell 2000, which is still suffering from this Spring’s “momentum meltdown”
The indices are diverging is one argument for a correction. Price to earnings and price to sales ratios are another (the latter should inspire thoughtfulness). The market is overbought, it lacks conviction, and historical comparisons are three more.
My point is simply discounting these arguments is not a helpful response, nor is wholly relying on them a safe thing to do. Take them in, as one should take most all reasoned arguments in, and then square them up against the fundamentals. In today’s market, given the current US economic environment, it just does not appear the Dow is ready to roll over to the tune of 1,000 points.
No, what I see is what I have been writing about – a market in wait, a market trading in a modestly climbing and widening range, a market willing to let the traders trade the news, the rumor, and the pivots.
So, today is an example of the above. The traders are trading on the good news is bad news Fed watching thing, the S&P is trading toward the middle-lower end of its range, and the investors are waiting.
In the meantime, the technology indices are in the green and the Russell 2000 is going back and forth between the red and green. Divergence? I guess. Showing a lack of conviction? Sure. Call me crazy, but what I am seeing in the market is nothing to hang a hat on relative to a serious correction. It is just the market being the market in an environment that has the US doing well economically and the rest of the world is trying catch up.
Trade in the day; invest in your life …
