Long title? Let’s talk about what it all means. Let’s start with sentiment. Good old fashioned emotion. Who loves, and who hates, the stock market. Why do they? It’s so interesting when you spend time trying to understand the human condition. How it’s conditioned to react to stimulus over short and long periods of time. When times are good for the average person, they are likely to take it with a grain of salt, but unlikely to mix it up. If things are good, so be it. Maybe I’m not trusting as much as I need to be, but I will trust it enough to stay positive. Things are good, then things are good. I accept it. Then we have the other side of the coin. Fear. When the stock market struggles for any period of time, folks grow sour. This includes even if a market doesn’t go lower too much. When it stops going higher for any extended period of time, people lose faith very quickly. We have been dealing with a market moving mostly lower for a few months now. It’s nothing terrible, at all, to be honest, just a correction to this point.
In this time frame we have seen the bull-bear spread go from 30.7% more bulls to bears, down to 7.4% more bulls to bears. A tremendous move lower, not to mention that just last week alone we saw a 10% drop in that spread. That is very unusual and shows how time can erode human emotion if it doesn’t get exactly what it wants. The spread is now single digits as I just mentioned, and although it usually takes an inverted number to get things rocking up, you can’t dismiss the fact that we are in single digits. That can be enough to get the market moving higher. It’s best if we’re near a minus 10% reading more bears to bulls, but when it’s only 7.4% more bulls to bears, things are getting there in favor of the bulls from a sentiment perspective.
Next up, there’s hope. When folks sour out on things, they need to find a way to believe things will get better. It’s no fun to live life with a totally negative view on everything. Whether it’s about your job, family, or even the stock market, when things aren’t going well, we tend to transfer our emotional energy to the world of hope. The hope that someone or something will come along and fix the problem, or problems, that is around for the moment. When that’s the case with the stock market you have to turn your focus and attention to Mr. Bernanke, the hero of all printing machines known to all of us.
Turn-it-on-Ben is rocking with free dollars, and is once again, promising that he will do whatever it takes to keep this economy moving along in a positive fashion. He’s clearly not worried about the future, and neither is the average person. Hope means to give me what I need and to give it to me now. There’s lots of hope out there, and folks want to be in the stock market. If you want to be in you can find a way to stay in the game. Hope is how you stay in the game. The Fed has not said a word lately to take that hope away. In front of congress yesterday, he said it loud and clear. He will do whatever it takes. That equals hope, my friend. Keeps people in the game.
Now the real culprit as to why the bears are having a very tough time understanding what in the world is possibly holding this stock market up. Considering the news from Europe, not to mention China, and other global headaches, one would think this stock market of ours would be in a massive free-fall situation. It makes sense to me that all the bad news around the globe would equate to us being in a recession, and possibly worse in time. This would normally mean our stock market is heading lower and doing so quite rapidly. It isn’t. The reason is interest rates. The Fed has made it such that you can’t get anything on your money if you leave it in the bank or tie it up for the long-term in low paying CD’s. That’s not what the average person wants for their future.
They want to think big. To feel that once they retire there will be real money waiting for them. This means they want to be in the stock market. Interest rates, if they were higher, would be great news for a rapidly declining market, and this would make the bears do the happy dance. Problem is rates aren’t going higher for many years to come. This is the number one reason why all the bad news globally refuses to crush the market for now. There may come the day where the financial devastation is too overwhelming , and the market is forced lower in a very large way. However, it appears it’ll take that kind of event to get things really rocking to the down side. All the problems to this point haven’t allowed for this market to tank out the way the bears think it should. It’s hard to blame them. The combination of sentiment, hope and interest rates keeping the bulls in the game for now.
There is always the risk that the worst case scenario will play out over time, possibly a financial catastrophe in Europe that spreads around the world. If that occurs, no sentiment, hope, nor low interest rates will be able to help things out. They may prevent a retest of S&P 500 666, but market death would take place for the short- and medium-term. A slaughter in the financials which would drag down the entire market. Why worry about how bad it would be simply because it would be bad enough. I don’t know if that can happen based on government intervention, but it did once before, thus, it can again. So much is going to happen along the way. You don’t know how things are going to work out in the end, but it’s safe to say that there are some deeply serious problems out there. The risk is there for both sides making the market difficult to play at best, thus, keep it light.
Leading stocks are not leading still. Many in bear markets, such as Deere & Company (DE), and Caterpillar Inc. (CAT), to name but a few. Apple Inc. (AAPL) is hanging in there, but still struggling with 580-gap resistance. The commodity world is in a confirmed bear market, but in the end, only two numbers matter. 1250 support and 1340 resistance, the long-term down trend line off the March 2009 bear market lows, and the 50-day exponential moving average respectively. Only when one of those breaks with force and volume will a directional move occur. The bulls did some damage on that big open gap up from a few days back. 1250 and 1340 is all you need to focus on big picture.
Peace,
Jack
