For the fourth consecutive week we saw inverted numbers with regards to the bull-bear spread. I thought that after the action two weeks ago we’d see readings close to 10%. I was wrong as it was only 3%, but it was still inverted for the third week in a row. When the numbers were coming out this morning, based on the market action from last week, I thought we might get back to flat. Wrong again, as it shot up to 10.8%, an extremely high reading for any bear market. Normally this type of reading leads to a strong counter trend rally as the market tries hard to raise the level of optimism that the bears are sorely needing to get another leg down. People start to lose their faith in the market once things don’t bid up over time. Think about it, the S&P 500 fell 19% in only eleven trading days. Nasty as can be. Then it spent eight weeks moving along in a bear flag pattern, which offers little hope for the bulls and lots of hope for the bears. So a drop over ten weeks with the market going nowhere but lower to some sideway action. Pessimism crept in slowly, and then fired up over the past four weeks.
This is the reason the market held the 1101 area or the old lows. It closed only two points below that level yesterday and after moving down to 1074 intraday, it closed well back above 1101 yesterday. 1101 was just too tough to break on a sustainable basis thanks to the bear trade being so full very short-term. It is what it is. You can argue that the market doesn’t deserve this rally, and most would agree, but we all know by now it’s not about that. It’s about human emotion at times of extremes, and we’re now at extremes with how much people hate the stock market. It equals a rally which started yesterday late and continued today. I’ll talk later about how far it can possibly go in the many weeks ahead.
Days like today, in a very quiet but open way, show how bad the financial stocks really are. There wasn’t much of a bid in many of those stocks today as there’s just no appetite to get in the way of these broken stocks. The Goldman Sachs Group, Inc. (GS), a major leader, was red. Bank of America Corporation (BAC) was red. On and on it goes. They underperform no matter what type of market we’re in, and the reason is simple. Not so much what’s going on here, which of course, isn’t good, but more of the problems attacking the financial system in Europe. Anything related to financial is in dangerous shape. At any moment defaults can come in, and not just from one place, but from multiple sources. The market rocks, but the financial suffer, other than the occasional day of out-performance when they get brutally oversold. It’s best to continue to avoid them at all costs until this once in a lifetime crisis passes on. That won’t be happening any time soon. The risk appetite is more towards the tech area where the bigger picture may not be bright, but compared to the world of financials, they shine.
The down trend line on the S&P 500 is at 1175. 1157 is the 20-day exponential moving average while 1190 is the 50 day exponential moving average. Each moving average along with that trend line will be difficult resistance. In a new bull market they wouldn’t be too tough, but in a bear market they will be very tough to clear with force, especially on the first test back up to those levels. This is why taking gains along the way is not a bad idea. I do think we have a real shot in time of clearing some of these difficult levels. But expecting a blowout up and through them on the first try is not appropriate thinking. In addition, the closer we get to just the 20-day exponential moving average at 1157, you will see the RSI’s on the 60-minute charts get overbought. They would be reaching 70, or even a bit higher.
The bears don’t offer much in terms of staying overbought, even on a simple 60-minute time frame chart. A bit possible but don’t expect much. It’ll likely be more of a chop rally over several weeks to allow pessimism to decrease. Good support at 1125, 1114, and then 1101, and lastly at 1074. The bears will throw in all these moving averages so never buy strength near any of those key figures. Use weakness to buy for the short-term. There are so many levels of resistance very close together that this too will make the journey for the bulls a tough one.
Try to keep your plays in the world of lower P/E stocks. While froth will get quite the bid you still can’t predict what type of news will hit overnight. It can be anything from country defaults to downgrades due to contracting economic conditions. A stock hit with a downgrade that has a high P/E is prone to a strong move down, even on an up day in the market. Any P/E below 20 is best. That, or buy ETF’s that move with the market, and thus, if you get the direction of the market right, you’re guaranteed to perform in line. The higher the P/E the greater the risk you’re putting yourself under. Why do that in this environment. Risk is the last think you want to be dealing with right now. No guarantee that even a low P/E won’t get hit on the wrong news as I have seen that take place in this bear market, but you want to keep the risk as low as humanly possible.
Look, folks, sentiment is a strong indicator to use when it gets at extremes. However, don’t lose focus as to what’s going on in the real world economically. This rally won’t last all that long but it will drive the bulls in and that’s when things will reverse back down. It’s no fun thinking about a longer-term bear market. I get it. It’s no fun for anyone, but we have to recognize what’s at play and move along the path given. I think we’ll be fine here for a little while, although, there will be down days. Bigger picture still isn’t very promising for now, but hopefully that backdrop will change.
Peace,
Jack
