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THE TECHNICAL PICTURE: MIXED
Last Wednesday, I wrote that it was time to Grin And "Bear" It as I expected a downside move after the S&P 500 hit its head on resistance around 1000. With the following chart, I mused about a downside slide to support around 900 (the October 10th closing low) or 839 (the same's intraday low).
The downside slide took place, with alarming speed. In the worst 2-day move since the 1987 crash, the S&P 500 fell more than 10% and hit support at 900 (899.73, to be exact). I can't take credit for any predictive ability, this rudimentary technical analysis doesn't always work but it provides a context for trading. Buying a short ETF around 1000 and covering around 900 was a sensible bet.
Looking again at the chart, what do we see? We see a possible "reverse head and shoulders" forming (click here for the definition from Investopedia). That would be bullish. However, if the "right shoulder" at 900 doesn't hold, we'd likely get a test of the next support level at 840.
Again, this is context and it's a hard call which way it will go until it happens. Technical analysis paints the lines on the playing field but doesn't play the game. In my view, giving up today's gap up is a bad sign and I'm anticipating a move lower with some of the short ETFs. This is a bear market, so my benefit of the doubt goes with the bears and I'm playing on their team for now. You can play the current context whichever way you prefer as long as you have an exit strategy to protect against big losses.
THE MACRO PICTURE: STILL BEARISH
Here's why I still carry a bearish bent:
--The dollar is still going up while commodities are going down. This is a deflationary move and is bearish for stocks. I've started a small position in UUP (Bullish Dollar ETF) because I think this will continue. For years the dollar went down compared to many other currencies. As other countries lower interest rates to try to stimulate growth (something the US has already done, almost to zero), their currencies will lose strength.
--Countries are racing to Zero on interest rates. On a related note, I recommend the following article from Bloomberg: Zero Rate World May Lie Ahead as King, Trichet Cut. Usually rate cuts are cheered by markets as easy money increases risk taking. But what happens when it doesn't work? You can give money to institutions, but you can make them lend or spend, especially when they need to deleverage (reduce debt). Are we looking at the Japanese situation worldwide?
--Unemployment is going higher and earnings are going lower. The unemployment issue seems obvious to most observers and is obviously bad for the economy. Corporate earnings are also going lower, and analyst estimates are still too high. Therefore, stocks are not as cheap as they seem, because the "E" in P/E is still too high. More downgrades are on the way (though hopefully not as bad as GM today, hit with a price target of zero).
--The Financial and Real Estate sectors are especially weak. With all the news about the election and General Motors, financial and real estate stocks have been quietly deteriorating. Goldman Sachs (GS) is acting terribly, and the strongest ticks on my screen are the Ultrashort ETFs of these sectors (SKF and SRS). Is another shoe about to drop, like commercial real estate, insurers, or something we're not even aware of?
--I had a rough weekend in fantasy football. This is probably not a good reason to be bearish on the stock market, but life is complex and a bearish mood can have many causes. If Frank Gore has a big game on Monday Night Football, I might be in a more bullish mood tomorrow!
Disclosure: Long SDS, TWM, SRS, SKF, UUP
Find more at www.thestocksurfer.blogspot.com.
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