Another ugly start to a week for the markets yeserday, as all three major indices fell with the Nasdaq and S&P each down more than 1%. It is looking like it is a good probability that our worst streak of weekly losses in the indexes since 2004 will be stretched out to six straight weeks. As this streak wears on, there are myriad signs that this is more than a minor consolidation in the markets before the next leg of the bull market resumes. The market has given back around 6% since its peak six weeks ago. I believe we are not even halfway through this pullback for the following reasons.
1. The selloffs are getting more broad based as we go forward. Notice that all ten major sectors posted losses today.
2. The nature of the market has changed over the last six to eight weeks. First we had the rotation out of financials, commodities, and the energy sector and into defensive sectors like healthcare. Over the past week it seems the market is starting to consistently accelerate its selloff over the last hour instead of cutting losses going into the close, which had been the trend.
3. Smart money is getting out of the market. M&A activity and IPO debuts have been going full bore all year, but the Linkedin (LNKD) IPO that doubled on the first day and the recent announcement that Groupon (GRPN) will go public at a $30 billion valuation may mark the top of the market. In addition, it was reported in today's NY Times that John Paulson and David Tepper are dumping their bank stocks despite their low valuations and the fact that these were long term holdings.
4. I think it should be obvious to all that the European sovereign debt situation is getting worse and is not far from spiraling out of control. This will have substantial negative impacts to the worldwide equity and credit markets.
5. Housing prices are not only not stabilizing, but according to the latest Case-Shiller index they are actually accelerating. Without recovery in the housing market, there will be no sustainable economic recovery. I think this realization is starting to sink into the market and is one of key drivers of the continued selloff over the last week.
6. The financials continue to break down. The XLF lost close to 2% today and is now down over 10% since the end of March.
7. Neither political side seems serious about reaching agreement on a budget deal to raise the debt ceiling. Both sides are playing to their base so it is highly likely this discussion will be put off until right near the stroke of midnight. This will probably involve some turbulence needing to happen in the markets before it does gets resolved.
8. QE2 ends in less than a month. Yes, I know the Federal Reserve will not withdraw all their support at once. However, this will start to reduce the excess liquidity that has been a key driver of the markets; especially high beta stocks and commodities. I am also not saying there will not be a QE3, which could surely happen if the market dropped precipitously.
9. As economists continue to ratchet down their estimates of second quarter GDP growth, this will eventually filter through to S&P earnings estimates which are currently based on much high domestic growth estimates.
10. On the anecdotal front, Apple (AAPL) has a huge confab which they unveiled a new product "iCloud' and after rallying early in the day, Apple stock falls over 1.5%. When was the last time that happened?
Although I think we have quite a way to go in this pullback, it is never too early to start to make a shopping list of attractive stocks to pick up on the cheap. Despite all the negative news out there, buying opportunities will present themselves. Be careful out there.