Stock markets rolling over

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Uncertainty over the global economic outlook yesterday took its toll on stock markets around the world as risk aversion favored safe-haven assets such as government bonds, the US dollar and Japanese yen.

In the US, stocks declined to their lowest levels since the end of May as investors await the start of the second-quarter earnings season.

I referred to the CBOE Volatility (VIX) Index in a post yesterday, and specifically to its use as a contrary indicator. The VIX, also known as the “fear index”, closed the day 6.4% higher.

All ten US economic sectors fell, confirming a pattern of the defensive-oriented sectors such as utilities, health-care and consumer staples outperforming the cyclical sectors like energy, materials, industrials and consumer discretionary. The chart below shows the performance of the sectors since the high of the S&P 500 Index on June 2, 2009 – a relative pattern as one would typically expect during a corrective phase.

defensive-pica

Source: StockCharts.com

The key moving-average levels for the major US indices are given in the table below. The S&P 500 Index yesterday breached the key 200-day line (for the third time in 26 trading days), joining the Dow Jones Industrial Average and the Dow Jones Transportation Index in bearish mode. With the exception of the Nasdaq Composite Index, the indices are also all trading below the 50-day moving average.

Click here or on the table below for a larger image.

defensive-pic1

Additionally, the Dow Industrial Average and S&P 500 Index also yesterday broke through the “neckline” of a head-and-shoulders formation – a bearish event. For more on this, key levels and the most likely short-term direction of the S&P 500 Index, Adam Hewison of INO.com prepared another of his popular technical analyses.

Click here or on the chart below to access the short presentation.

defensive-picb

Turning to Richard Russell, 84-year-old writer of the Dow Theory Letters, the excerpts below cast light on how he sees the lie of the land.

“I’ve repeated the bearish factors so many times that I hardly have the energy to go over them again.

• The Lowry’s studies indicate steady deterioration in the strength of the stock market.

• On top of that, we have the still-operative non-confirmation by the Transports.

• We have the overvaluation from the standpoint of Dow and S&P dividend yields.

• We have the recent breakdown of the Industrials from a head-and-shoulders top formation.

• We have the Dow graded as bearish (it’s below 10,725) under the 50% Principle.

• We have NYSE volume tending to contract on days when the market is higher and expand on days when the market is lower.

• We have the market acting poorly in the face of ‘brightening’ business news and numerous Fed ‘green shoots’.

• Above all, the primary trend of the market was last confirmed as bearish under Dow Theory.

We have the majority of analysts insisting that March 9 was the bottom of the bear market. Here I apply contrary opinion.

“‘So how will this work out?’ I ask myself. The market could just continue to sink with very little in the way of rallying ability, until the March 9 lows are tested and violated. The damn trouble with this market (from the bulls’ standpoint) is that it shows no signs of becoming oversold, the Selling Pressure Index just keeps creeping higher, and the Buying Power Index continues to deteriorate. This is one nasty bear market if there ever was one.”

The technicals undoubtedly look ugly, and investors will now focus on the second-quarter earnings reports as a test of whether stock prices have run away from fundamental reality. As Randall Forsyth said in yesterday’s Barron’s: “‘Less bad no longer is good enough’ has become the new market mantra.”

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3 comments to Stock markets rolling over

  • Frank W

    Well, the market has finally come around to the point that even the proverbial Blind Freddie can see that it is not in bull mode. Well, maybe not everybody. You have still got that academic nitwit Siegel saying that now is a good time to buy. As far as he is concerned, anytime is a good time to buy. It doesn’t matter whether the market is going straight up, straight down or plumb sideways. The big question now is whether consensus opinion has got it right that the March 9th low was the bottom or will the market go thru that low and make a new bottm. There have been a fair few very cluey analysts like Albert Edwards and Ben Sedacca, who have stated they see the bottom at around 400 for the S&P 500.

  • Thomas Bach

    This particular head-and-shoulders pattern has been mentioned numerous times in the last two weeks. I have heard it and seen it mentioned hundreds of times already. What everyone sees is usually wrong. There can be NO EDGE in betting with the majority. Most professional traders are also aware of the pattern and will be quick to fade the move (catching and squeezing naïve retail in the trap).

  • Frank W

    Chart patterns are exactly what traders look at. Most traders could not care less about anything else, especially fundamentals. The only thing this market has going for it is the lack of selling. Buying pressure is actually less than that obtaining at the beginning of this rally. Without any selling, a tiny little bit of buying can provide a substantial boost to the market. The reason that there is no selling is twofold. One is that the market is taking a wait-and-see attitude, not being sure that this rally is for real or false. The other reason is that buyers think that they have gotten a fairly good deal having bought at the previous lows, even if the market makes new lows. Some people HAVE TO BUY — like pension funds. They can’t stay liquid.

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