Positive surprises have outnumbered disappointments by more than 5:1 for companies within the S&P 500 this earnings season. The median firm has reported YOY growth of 13.1% -- 3.4% ahead of expectations. With another round of double digit earnings growth, I'm still short-term bearish and have reason to believe the S&P will sell off this fall.
* We’ve already seen some evidence of that slowdown in data released during the past few weeks. Yesterday's report on consumer confidence didn't do any good to the reasoning that Fed will be stopping soon (I believe atleast two more rates hike to 5.75), as confirmed by yesterday's stronger dollar action.
* A model developed by a Fed researcher puts the odds of a recession occurring in the next year at more than 35 percent. This possibility, along with uncertainty surrounding the US midterm elections, traditional seasonal weakness in September/October, and the conflicts in Mideast leads me to the conclusion there’s potential for another selloff this fall.
* The Nasdaq looks much weaker than the S&P. Nasdaq has broken its June lows and retested its October 2005 lows last week, which it could not hold as evident by the Nasdaq Summation index (image below). That level of support has held reasonably well, which at least establishes the potential for a bottom. Take a look at the following Nasdaq Summation Index (Historically, major market bottoms occur after the index falls close to -1000, we're at 827.)
* The follow-through days have been lackluster, where indexes have rallied strongly only to give back the gains, thus further undermining the potential of a reversal in the current bearish trend.
* As I mentioned in a different post from today, "the global economy has been coping with high and rising oil prices for five years, but a choke point may be at hand because the most recent price gains are not being fueled by strengthening demand."
* With the AAII sentiment level being at an extreme of 58% bearishness, it sure makes one try to think contrarian. I think it would be wise to wait until September/October to bottom pick stocks & ride the bullishness beginning in November. (Nov. to April have historically been the best months for S&P)
* Lastly, I'd like to present a comment from one of my favourite blogs: 'At These Levels' says:
Conventional wisdom says to look for a bottom just before the November election. Approval ratings suggest Republican majorities in both houses of Congress are at risk. There are clearly identifiable election-year cycles at work, the most famous of which occurs during the second year of a presidential term. Such years in recent memory are 1990, 1994, 1998 and 2002. Not all were terrible come December 31, but all saw some violent action. In other words, be prepared.
I strongly agree with that.