That doesn’t mean anything bullish bigger picture, but it is playing a role for the very short-term. The updated bull-bear spread came in today showing 5.4% more bears than bulls. This is very unusual and almost always means the worst is over to the down side. Temporarily! It does not weigh out bigger picture over the fundamentals controlling things globally. The global problems are huge, and they have not finished causing massive headaches for this market. I had a feeling the numbers would invert on the spread simply because we were only at 1.1% more bulls going into last week, and with the market action we saw last week, the bears rocked in big time.
An inverted bull-bear spread does not mean the market just goes straight up. It acts as a buffer for bad news when it hits, and it’s hitting almost on a daily basis it seems. It keeps things from getting out of hand. What will need to happen is an unwinding of the sentiment issue over the weeks to come. Only when things get more unwound will the market be ready to fall hard once again on a more sustainable level. It can fall hard now, but it won’t be easy to sustain any move down. The inverted level of 5.4% more bears can get worse. It can go lower, but that’s not what normally occurs. The more inverted the sentiment gets, the better the rally to come once some good news hits the market.
That’s the key. Sentiment alone won’t move a market too much higher. However, any drop of good news and the full trade will force bears to cover their shorts to some degree That gives the market some short-term only fuel for some higher prices. It’s not unusual to get an 8-10% move higher once the fuel kicks in, but again, it needs a catalyst. Where will that type of catalyst come from? It won’t be an easy find in this environment. However, you’d be surprised at how the market can almost find a catalyst if it wants to have one. Nothing easy here, but the sentiment should, at least, prevent the market from getting hit too hard if more bad news hit. You can be sure some will.
Markets ultimately trade on fundamentals. That’s always going to be the big picture. The fundamental problems we’re facing are from two areas. We have to deal with defaults in Europe. We also have to deal with a recession in the United States. Which one is worse? It’s not worth the comparison. The more immediate concern for the market seems to be the daily bad news coming out of Europe. Greece is supposedly going to default sooner than later. The other countries in Europe are trying to figure out a way to prevent this nightmare from taking place.
Is there a solution?
There doesn’t seem to be one for now. It’s not for lack of trying, but all they seem to be able to do is put a bandaid on a huge gash. It’s just not happening, but for the moment no one has officially defaulted. Let’s hope it never actually becomes a reality, although there’s every indication Greece will default. Not only that, others may follow once Greece goes down. The domino effect. It could make the future of many of us unstable, to say the least. The market is also dealing with the potential for a major recession right here at home. The news is borderline these days.
The manufacturing report is sitting right on the edge of contraction. It’s been that way for two long months. It makes everyone uncomfortable. One more bad report and its contraction time and that probably means contraction for stocks, and their bloated P/E’s. Earning’s will decline, and thus, so will the market. Two ugly forces out there, which should remind you that any rally is more of the bear market type when it shows up. Therefore, you should not be thinking of bull strategies big picture at this time.
Shockingly, for the first time in a long time, even the bank stocks look ready for a bounce. But again, it’s nothing to write home about. It won’t knock your socks off, but there are some good signs on the daily charts for the short-term. Maybe the technicals won’t work for these stocks, but recently we did see the same technicals work for the semiconductor stocks, which had been about as bad as the bank stocks were. If they worked for the semiconductor stocks, maybe the same set-up will now start to kick in for the financials. I wouldn’t bet the farm on it, but at least there’s a drop of hope in them for now. The life insurance stocks also look ready for a move higher, and it seems like forever since that, too, was a buy. Don’t get carried away. Remember, lots of down days, but at least there’s some hope in some areas we haven’t had any in for quite a while. If it does play out in the short-term, I wouldn’t expect much beyond that.
The market has been dancing up and down the current bear flag for nearly six weeks now. It gets old and boring and everyone is waiting for the eventual breakdown below S&P 500 1101, the old lows on price. Six weeks isn’t out of the ordinary, but it is getting quite extended. The range being 1235 down to 1101. It took 11 days to lose nearly 19% on the S&P 500 . The move was so severe and done so quickly, the bear flag is extending out due to the massive pessimism we currently are dealing with. Maybe someday soon it will get taken out. I think it has a good shot to do so in time, but not now. It wouldn’t surprise me if the flag extends out quite a few weeks more than anyone thinks possible.
If we could build up some optimism, I think the market would fall hard once again with more regularity. The flag needs to be respected for what it is. Tons of whipsaw as you all are getting to know first hand. Huge moves both ways as the range is nearly 11%. That’s big and that’s tough to deal with. Only when we can break forcefully above 1235, or forcefully below 1101 will we see a more directional move that’s sustainable. Until then, the opposing forces will remain in play. Lots of whipsaw with moves that make you think we’re about to break out, and moves that make you think we’re about to break down.
Peace,
Jack
