7 Reasons Why Stocks Are Set to Resume Selling Off

by: Danny Furman

U.S. indexes were all up in trading June 29, headed for a third consecutive day of gains. Recent employment, consumer sentiment and housing data have all been rather dire, however commodity prices are falling, providing crucial assistance to vital consumer spending. While cheaper gasoline is a temporary boon to domestic GDP, declines in employment and real wages of those with jobs are greater adverse factors. Despite the recent bounce across major indexes, the following seven reasons suggest the broad sell off that began in early May is imminently set to resume:

1. Leaders Are Lagging: Indexes have spent early trading June 29 as much as a percent up, however bellwether stocks are largely stuck in the red. Apple (NASDAQ:AAPL), Caterpillar (NYSE:CAT) and Salesforce.com (NYSE:CRM) are all down and seeing greater relative volume than most names. Leading homebuilder KBH reported widening losses this morning and is trading down 15%. Similarly, a majority of worldwide indexes staged rallies the 29th as a Greek debt resolution instilled confidence in the eurozone. However leading emerging market China's indexes suffered over 1% losses, closing with waves of selling.

2. Dash for Trash: Speculative manias large and small often peak as companies suffering from adverse business trends receive inflows from investors looking for value in an expensive market. June 29's best performers in early trading include AIG (NYSE:AIG) and MGM Resorts (NYSE:MGM). Bankrupt Blockbuster (OTC:BLOAQ) is up 9%.

3. Final Days of QE: While the Fed hardly plans to reduce its enormous balance sheet, scheduled buying under QE2 will cease this week. Recent data suggest the U.S. economy is struggling to organically grow and create demand. State pensions, consumer spending and job creation all directly depend on strong asset prices and tax revenues from economic activity. In the current state our economy is fragile and needs all the help it can get.

4. A Greek Resolution Solves Nothing: Demand in Europe is facing relatively similar struggles compared to that in the U.S. Belgium hasn't had a government since early 2010 and Greece is the smallest of the notorious PIIGS. Patchwork economics has become the norm despite abundant evidence that a can kicked down the road continues to pollute. Broken systems such as the dysfunctional eurozone require renovation, not fuel.

5. Volume: The busiest trading days over the last two months took place in mid-June, at the trough of the recent trading range. Conviction appears to be strongest in sellers, with buyers apparently all in or waiting for lower stock prices. Without a heavily bought upward move, the S&P 500 (NYSEARCA:SPY) will struggle to hold shaky ground above 130.

6. Lack of Global Economic Support:
Pulling out of Afghanistan is great for U.S. troops and the freedom of the area's inhabitants. It is not, however, conducive to systematic order vital for capitalist economic growth. From Egypt to Israel to Libya to Syria to Afghanistan, consumption is taking a back seat to power struggles. Japan is focused on survival and rebuilding, while South America seems intent on bringing communist regimes into power.

7. Frontrunning the Fourth: Bulls and bears alike are aware that an Independence Day celebration tends to be in the cards for U.S. stock markets. As Joseph Shaefer points out here, however, the "dog days of summer" tend to follow rather than a "summer rally." With the holiday taking place Monday and only two trading days prior, bulls appear to be playing a dangerous game of chicken.

In order to limit risk while seeking to maximize gains in a broad stock market sell off, my preferred method for short exposure (click here) remains buying index put options on sectors facing dwindling demand. After re-establishing a position in retail ETF XRT this morning and including existing puts on technology ETF QQQ, my account is currently one bullet shy of maximum short allocation based on personal trading rules.

Disclosure: I am short QQQ, XRT.