This Week Is Likely To Bring Out the Bears

We’ve seen a decent rally over these past few weeks, but I have a feeling that poor earnings, along with poor economic data will lead the markets lower. First, however, let’s recap some of the most recent fundamental occurrences within the markets:

• The economy lost 80K jobs in March, bringing unemployment to 5.1%.
• Frontier Airlines (FRNT) just filed for chapter-eleven bankruptcy protection.
• General Electric (GE) posted their first quarterly drop in profit for five years.
• Oil prices traded at a record high of $112.21 a barrel last Wednesday.
• The University of Michigan Consumer Confidence recorded a 25-year low for the month of April.
• The National Association of Realtors' index of pending home sales dropped 1.9 percent during February to 84.6, the lowest reading since 2001.

Plainly, this is all very bearish news, leading me to believe that this recent upside move across the indexes is unwarranted. The technical picture doesn’t look any better. Let’s take a look at the S&P 500:

The S&P 500 has been trading within the 1270-1400 range for the past four months now without really giving us a definite path to the upside or downside. However, this recent rally to the 1390 area (heavy resistance) has been riding on very low volume and overall, this market looks to be headed lower. We recently just received a sell signal on the stochastics indicator and the MACD is rolling over as well. The Relative Strength Index also looks bearish. Could we retest the lows of 1275 in the next few weeks? Only time will tell, but I’d say the odds are fairly high that we will.

Also, just a quick chart analysis on the Financial Select Sector SPDR (XLF):

After a somewhat short rally from $23 to $27, the XLF looks to be headed lower from a technical perspective. It has been trading in a fairly tight channel for the past six months now, consistently setting a series of lower highs and lower lows. This trend looks set to continue into the coming weeks. The stochastics have already provided us with a sell signal and the MACD looks set to confirm this selling point within the next few days. Also, similar to S&P 500, volume has been fairly low on the XLF as it has approached the upper end of the price channel, thus giving us a fairly credible argument to initiate a short position for the ride back down to $23.

In my opinion, if the big money isn’t playing, then I think it’s safe to say that we may see further downside in the immediate future. Keep an eye on economic data due out this week, including retail sales, PPI, and housing starts. We also have earnings out from big names including Intel (INTC), Washington Mutual (WM), Coca Cola (CCE), IBM (IBM), Merrill Lynch (MER), and Google (GOOG). These announcements will play a defining role in the direction of the markets for the upcoming weeks.

Good luck.

Disclosure: Author has no position in the companies mentioned.

Comments

[drmalaka:]

Great information.

I wonder why all the bulls point to the March bounce on the S&P as a successful test on the lows and thus a bullish indicator? If you apply that same standard to the XLF graph above then March was a blow through the Jan lows which would be quite bearish I believe.

2008 Apr 14 06:58 PM

[karchad:]

If bearish news causes the market to go down, how does one explain 2003? Or 1991? The news couldn't be worse in those years. Sure, GE can send the market down for a day or two, but look at February and March. Considering that news services such as CNN are literally POUNDING the people with the worst news they can print (and sometimes invent), I'd say the market is holding its own. Please note that homebuilders stocks are in fact up for the year 2008. I believe they led the market down, and they are about to lead the market up. Next, believe it or not is financials. I know you don't believe it, which is why I think it will happen. In fact, I'm investing in it.

2008 Apr 14 10:32 PM

[Jetlag:]

You have got to be kidding. Frontier Airlines is no barometer for anything related to the economy. They had a poor business plan that did not keep pace with the current market. While the $110 oil was a final nail, they would've been challenged at $80 oil. You have to make a better case for a bear market than the demise of Frontier.

2008 Apr 14 10:43 PM

[Jim Hawthorne:]

Whoa, Jetlag! You comment, "You have to make a better case for a bear market than the demise of Frontier." Remember that Frontier is the 4th carrier to file Ch. 11 in the last few weeks! (Aloha, ATA and Skybus being the others)
The MD 80 inspections have all but crippled American for this quarter, and the FAA will now move on to the other carriers. Frontier is only a symptom; it is not the whole case!
Andy Cole makes a pretty good case on the technical weakness of SPY and XLF, but also notes that the fundamentals are also looking more and more shaky.
This market is very badly broken and will take more than positive thinking and a few short weeks to heal. Until the financials turn positive both fundamentally and technically, it's far too soon to call a market bottom!

2008 Apr 14 11:29 PM

[User 130076:]

Andy did you come up with this all by yourself or did the teacher help you?

2008 Apr 15 09:37 AM

[Mong:]

I think he probably did it himself. A better tech analyst than a car (auto) analyst probably. lol

2008 May 21 10:30 AM

[Mong:]

Andy, is there any way to get your charts LARGER? Larger charts are de rigeur if one is to take your charts seriously. All too many people just dump a small chart into their commentary ... and such charts are not helpful.

2008 May 21 10:39 AM