Market Currents
Bulls have been unable to get much done, and almost all major indices have now broken through...
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Saturday, May 12, 2012, 4:20 PM ETBulls have been unable to get much done, and almost all major indices have now broken through key uptrend lines from Oct. 2011 lows. While it's still early to peg this as a major trend change, prices are likely to meander lower in the short term.
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The author mentions 1340 as a critical level of support for the S&P and several days ago it hit 1342 and the buyers stepped in and reversed what could have been a disastrous day. If it breaches 1340 to 1342 in the near term the next landing spot will be in the area of 1265.
Longer term, liquidity must be taken into account and one possibility is that while Europe is falling apart the Fed opens the dollar window and the ECB engages in unprecedented easing through bond purchases, reducing collateral requirements and other steps we could see some markets rise amidst a global meltdown.
Weird.
Been a bear since mid-March.
It also fits in with the resolution to a 3 Peaks and a Domed House pattern that I mentioned above.
Despite all the recent new handwringing over French and Greek elections, supposed threats of nonpayment of Greek loans, predictions of new conflict between Germany and France, and, now, the surprise $2B loss by JPM (from the feared and hated banking sector), the S&P500 has managed to stage a sell-off of only 4.65% from its recent high, after a long run-up of over 25%. Hardly a suggestion of fear or even much nervousness about the economy or market valuations, this minor retreat looks like a typical "correction" and speaks of the surprising strength of the indices.
If this behavior persists, we'll have a typical horizontal consolidation, lasting weeks (it's been six weeks already since the recent SPX high), where doubters persist in predicting a major downturn, but where, instead, corporate performances continue to advance, while share prices remain relatively stagnant, continuously improving the share-price value equation. Such horizontal consolidations are often broken by rapid upward advances.
I am bullish about the coming week.
Technical analysis has its place and should be studied carefully. However much of the chart watching is great rear-view mirror stuff. "If this level holds," and "if this ascending wedge pattern breaks down," etc. Many on S. A. understand the basics of technical analysis. Of value, yes. Are there real patterns to be seen, yes. But I'm not a "risk on, "risk off" every other week kind of guy.
Lastly, some of the doom and gloom crowd make an underlying assumption to which I don't subscribe: no policy response. It this possible? Yes. Is it probable? No.
While the Euro and some EU nations may fall (I concur it is a slow-motion fiasco), it isn't a Black Swan event. Everyone knows about the PIIGS, the Euro, and the associated banking collapse and global inter-connectedness. When the chips fall, it's been a drama, perhaps a calamity, but not a surprise. It's more like a tragic Italian opera than an nuclear explosion.
Therefore, for the true disaster scenario, it seems one must assume that the global economic and banking community will just let it happen. No policy response, no deathbed conversions, no nothing. All the bankers and politicians just sit tight, buckle their chinstraps and pull the toilet bowl lever.
I read lots of regular SA commenters who've been saying that since last October. In fact, some have been saying that since after early rallies following March 2009.
But the reality is that fundamentally profit and economic growth is slowing and we are entering one of the more difficult periods in the stock market.
The rally from last October was led by bank stocks, many of which have very poor fundamentals, that alone is a sign of a top.
Personally, I think the outlook for regional banks and other realty-related issues is excellent.