Friday was another very bad day for the market, with the bears re-exerting full control after a weak bounce on Thursday. The S&P 500 closed down 1.4% on the day, 2.25% for the week and for the month of June so far, -5.5%.
The market has reached an oversold position on the daily charts making the chance for sharp rallies a distinct possibility. Of course the difficulty in investing in this market is picking tops and bottoms; a likely lesson in futility. Trending markets tend to continue much further than many feel is possible. both on the upside and downside. Market prices also tend to move to areas where the weakest holders are positioned, whether it’s the long or short side of the market.
We see sentiment in the market turning more towards a bearish reading and there is, therefore, the potential for a rally based on this. Unfortunately, when a market is technically supposed to rally and it does not, it can lead to “air pockets” in price to the downside raising the level of stress for market participants. Should this happen, there is a possibility for better market action.
We would not be surprised to see increased volatility to the upside and the downside in the coming weeks, frustrating both the longs and shorts simultaneously. Still, it is difficult to see whether the market is rolling over to a more significant downside move or if this is just a correction.
The economic statistics and earnings reports in July will go a long way in determining the mindset of the market participants. Rather than trying to predict the exact bottom, we prefer to wait for the market to tell us that it is ready to rally. There will be many clues to this and we will wait for them to line up before we act.
The week ahead will see a pickup in economic statistics for the market to digest. It is doubtful the trend will change for the economy with oil prices remaining stubbornly high. Sharp spikes in oil prices have a delayed effect on the economy. With the economy so weak prior to the spike, damage could be significant.
Historically, it is very rare for the market to go from a bull market to a bear market without a longer topping process. We at Momentrix believe that the 21st century markets are, in fact, defining a new normal influenced by the increased velocity of all information, the new levels of transparency of that information, and the universality of instant access to that information for all market participants. Therefore a switch in direction (bull to bear) could conceivably be more rapid in today's market.
The market is historically cheap and there is still a possibility that stimulus could help improve economic conditions, although delayed (monetary and fiscal stimulus can have delayed effects on the economy as do oil prices). However, this market rally may actually be fundamentally overpriced lookinf forward, owing to the influence of QE2. If that is the case we could see further downside price action as participants determine market fair value. This hypothesis is an outside chance but we feel that it must be contemplated. The bottom line is that we will remain defensive and make smaller, carefully chosen investments in the market until better conditions occur.
The Momentrix View of the Markets , for 6/10/11-
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