The news gets worse and worse out there as many are now thinking the market is doomed. I am receiving many emails from other letter writers, and most of them are quite bearish, predicting a slaughter in this market. Maybe that will be true, so thanks to those of you sending in those notes. I enjoy reading them as the writers have fallen into an emotional state. When a market struggles for a while, and there’s more to come folks, the masses get bearish quite easily. That’s totally understandable. I go back to my favorite way of thinking about the market. Greed is easy. Fear is tougher than tough.
When markets get a bit scary, the masses will turn their opinions around rapidly. They’ll go from bullish to bearish in the blink of an eye. It’s the way they protect themselves. Action through fear. The most normal state of being in the stock market. We are there, and if we sell harder down to 1340, or a breach lower, the negativity this market will be dealing with will be incredible. It’ll be pouring out of people’s eyes.
The fear will naturally overwhelm, and folks will run to the sell button, and the unwinding will be on in full force. Markets find a way through time and price to unwind after a prolonged period of euphoria and overbought conditions. It’s the way of the market. Always has been, and my guess is, that’s how it always will be. The market responded in kind today as it reacted to news last night, which I will discuss shortly in this letter. The whipsaw is here. The sentiment is eroding. The process is under way in full force.
The issue of sentiment is really starting to unwind nicely for the bulls. Just two weeks ago we saw the bull-bear spread as high as a bit over 31%. It”s getting very close to the 35% level, which usually takes a market down hard as the bullish trade is basically full at that level. It can get to 40%, but 35% is the huge red flag we all need to pay attention to when it gets there.
In just two weeks, we have pulled down 11% off the spread, which is now at 20%. The bulls have to love that, and if the market continues to struggle overall in the coming weeks, we could see the level get knocked down to the low teens. That would require one additional sell-off that looks scary. For now, the bulls have to be very happy about how things are unwinding down with regards to sentiment.
The market lives and dies off of what we see with regards to corporate earnings, not only in how they report the present, but more importantly, about what they say the future looks like. We have seen some fairly benign reports thus far, although most stocks are getting sold on their reports due to the market needing to unwind. International Business Machines Corporation (IBM)said some good things about the future, but since the stock made its 210 measurement, it’s now struggling, even though the report was good with regards to guidance.
Intel Corporation (INTC) warned a bit, but held up well overall. If most of the numbers come out alright, and more importantly, we hear things look good for the future, this market should up rather well. If the numbers get worse, or if the guidance starts to fade as more and more companies report their numbers, we could see the market sell down to that 1340 level of strong support on the S&P 500. In the end, it really is all about future earnings power, and thus far, it hasn’t been great, nor has it been bad. Lots more reports to come from current leaders, so stay tuned in.
All eyes are on Fed Bernanke for now. What is the Fed to do tomorrow? We know in theory he doesn’t mix in with what’s going on in Europe, but I don’t believe that’s truly the case. Tomorrow is a huge day as there’s a debt offering from Spain. This will be watched very closely by everyone. If it goes poorly, this will be the catalyst, I believe, for a test down to S&P 500 1340. If it goes well, the Fed gets quietly involved, then I think the market will try to move to the top of the range at 1422. No one knows what will take place, and maybe our Fed won’t actually be involved. I wouldn’t count on that, however. 1340 is key support that he doesn’t want to see broken. 1422 is resistance that he’d love to see get taken out by the bulls.
Tomorrow will be very interesting indeed.
Peace,
Jack