Market Outlook: Stay Cautious

I often state that looking at broad measures of stock prices can be misleading. Instead of focusing on top-line numbers, we must dig deeper and attempt to uncover information that other investors have ignored.

A recent example has been my focus on the lack of confirmation across many different indices. As the NASDAQ and S&P 500 rallied above their 200-day moving averages (MA), investors began to think further gains were on the horizon. However, I remained troubled that a handful of markets, most notably the Dow Jones Industrial (Dow) and Dow Transport Averages, refused to confirm these recent highs. Knowing that weak markets typically drag down the strong, I've remained cautious.

This week showed why caution was warranted. Monday's 187-point drop in the Dow pulled the index below its important 200-day MA. Just as ominous, down-volume was 94% of total volume that day. This action marked a day of extreme panic wherein investors were fleeing stocks. Typically, 90% down days are followed by quick rallies as investors look for bargains. Instead, the market declined an additional 115 points over the next two trading days.

When a brutalized market will not rebound, we must remain cautious. Such activity is a sign of great weakness. With the damage done so far this week, the broad indices I follow are on average 6% below recent highs. When you consider that some of these highs were achieved last Thursday and Friday, you get a sense of how dramatic the decline has been.

Understanding the pummeling that has occurred, we turn our attention to what will happen next. I am not optimistic. A series of new confirmed highs over coming weeks is unlikely. Further, the Dow is approaching its 50-day MA. Were the 50-day MA to fail to offer support, prices should decline through the current trading range and approach 7,400.

With odds skewed in favor of new lows, we should remain cautious. For the past month, my clients' accounts have had little equity exposure. By positioning for weakness, we have retained flexibility that will allow us to react to future price swings. For now, the focus remains on the Dow's 50-day MA (currently 8,353). If bargain hunters fail to materialize at that price point, markets have much lower to go.

Comments

[doubleguns:]

The amount of treasuries sold each week have to drain funds from somewhere. They are still selling some (excluding the QE bonds) so money keeps going to them that could have gone to the market. And there are a LOT more to be sold.

The largest sale in the history of man occured this week.

Jun 19 07:54 AM

[cynewulf:]

For the past month your clients have not been in stock while the market has gone up.O.K.. Tell us what to do MERLIN.

Jun 19 09:47 AM

[chleoku:]

Look at this nasty graph comparing our recession than the last
depression:

www.wealthalchemist.co......

Looks like the capital injection won't help and it only prolongs the
recovery...now we are stuck.

Jun 19 11:20 AM

[Larry House:]

I'm quite cautious now, but I wasn't in March. I am raising cash for a better entry point at some point in the future.

We have let "green shoots" go to our heads. Many are ignoring some of the truisms that have been proven time and time again. 1) Market forces are the best way to let the economy heal; 2) bailouts only push the day of reckoning further into the future with a WORSE outcome; 3) our economy cannot be controlled like a puppet on the Fed's string--their timing is never right--inflation is a given at some point. And there are others that can be added. The upshot is that we are in a horrible mess and creating a worse mess. This will not end well. Caution, at the least, is called for.

Jun 19 02:04 PM

[Spartacuss:]

I wish you guys could move off the technicals and consider fundamenntals for a change.

There is no underlying basis for growth. Unemployment while trending to less does not mean less is better. What it means is that the rate always shallows asymptotically as you approach zero in any math function. In other words this "green shoots" thinking is a total head fake.

The bottom feeders swooped in as is normal. Now the feast is over.
We have to look at a resurgence in industries. A resurgence can occur if business in general picks up and business can only pick up if the consumers can buy more. We look at the upcoming, this fall, of loss of unemployment benefits, the mortgage resets coming, the baby boomer retirement problem and the toxic assets on the big banks off balance sheet situation coupled with only a 4 percent average equity and we have the mix for a perfect storm.

Then mix in all the smarmy politically fixes to our problems and we can anticipate with almost 100 percent accuracy that the Pelosi, Frank, Dodd, come Obama solutions are the most toxic of all.

We have drunk heavily of the Hemlock cup whose initial symptoms are a little touch of euphoria.

Jun 19 04:14 PM