First off, I believe that the market will trade lower. I believe this because the situation in Europe is not solved by a long mile, and because of the insight offered in my article "A Simple Insight Into Market Direction," where the S&P 500 (SPY) follows earnings estimates, earnings estimates follow the ISM, and the ISM follows the real time surveys.
However, there are three factors that will have to be considered as the market goes lower, where each of them might be relevant and at some point set a bottom:
- First, one will need to be attentive to the murmurings out of the Federal Reserve. Any sight of a quantitative easing 3 will set a bottom for the market and we will head for the races. Pretty much anything else, including earnings, fundamentals and economic developments, can be ignored if the Fed decides to print;
- Second, one needs to follow sentiment. If, during this descent, sentiment becomes too negative, that should be enough to produce at least a rebound. My own favorite here is the AAII survey, but there are other sentiment measures that have proven to work as well;
- Third, one must remember something from a while ago. During the first months of 2012, I warned that some of the economic improvement being seen back then was probably a mirage. And later - that would be now - the mirage would turn the other way. So we must take into account that some of the economic readings out of the jobless claims, non-farm payrolls, etc, might be misrepresenting reality a bit to the downside, through their seasonal adjustments.
While I expect the market to head lower in the short term, there are several important factors which need constant monitoring, lest they produce a bottom. This should also mean that as the market goes lower, one would do well to slowly transition from a net short position to net long on interesting, cheap prospects which abound in the market right now and about which I have been slowly writing about.