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I don’t think stocks have broken their long-term upward trend but that’s a worry that means this market will take a while to base

posted on August 11, 2011 at 12:30 pm
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You’ll be hearing a lot of talk over the next days and weeks from the technical analysts about the damage that’s been inflicted upon the condition of the markets. That’s one reason, they’ll say, that this market won’t bounce back immediately from its extremely oversold current condition and begin a new rally.

But what does that mean when you translate it?

Actually, it’s pretty straightforward. What the technicians are saying is that the market’s plunge has taken stocks down to levels that make it hard to tell whether this is a short-term correction in what is still a market that is trending upward in the longer term or if this drop has broken the longer-term upward trend and the market is about to drop further.

For a while it was possible to believe that this decline would take the Standard & Poor’s 500 back to its November 2010 lows near 1170. That level has now been taken out, spooking anyone who thought 1170 was the bottom—and who bought on that belief.

The next likely bottom that shows up on the charts is around 1020 to 1060 where there is a lot of support represented by the stop seems to be around 1020 to 1060 where there’s a lot of chart support represented by the late August, July, and February 2010 lows. Those levels represent another 5% to 9% drop from yesterday’s 1120 close on the S&P. That’s a significant loss from here but it’s not earthshattering.

If it’s the end of the drop. But a big decline like this brings out all the doom and gloom that lies in every investor’s heart. And I’m hearing talk of a return to the March 2009 low at 683. I think that’s unlikely—I think it’s fear speaking. But if the market did unwind the complete gain from the 2009 low, it would certainly shift the long-term trend from up to down. Which is one of the worries that are weighing on the market.

If investors can’t tell where the bottom might be, you’ll understand why they might be reluctant to start buying immediately. Yes, the market is oversold, but oversold markets can get even more oversold before they bounce or rally or whatever.

What ends this kind of uncertainty?

Days of volatility that don’t actually puncture any new support levels. In other words investors need to see stocks move down to test support levels, and then move back above support without setting new lows. That kind of market action would gradually build confidence that stocks are just in a correction and not in some new longer-term downward trend.

August isn’t exactly the best of times for building a new base like this. Lots of investors—individual and institutional—are on vacation and therefore stock market volumes are below normal levels. (For example, institutional investors are certainly watching their portfolios but they’re not rushing to put on new positions.) Those reduced volumes mean increased volatility and bigger swings in stock prices. When emotions are running as high as they are right not, those bigger swings can themselves add enough fear to the markets to take prices down another step.

What I’m looking for in this environment isn’t a big up day that reverses the trend but rather lots of days of moderate action—both up and down—that gradually convinces investors that buying at today’s low prices isn’t an exercise in catching a falling knife.

 

 

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4 comments

  • mrobinson21 on 11 August 2011

    Aloha Jim,
    You wrote about Svenska Handelsbanken SVNLF in NY, SHBA.SS in Stockholm. I went to chart it and could not find a dividend for SVNLF but I did for SVNLY. The SVNLY ADR lists the dividend as 8.25%. Would you please explain the difference to me? I had the same situation with McArthur Coal (thank you for that one)and when the buyout came I was confused with what the price would be for my ADR which was MACDF not MACDY, the latter I was not even aware of.

    Mike

  • mopama on 12 August 2011

    Very interesting article Jim! This other one could shed, on the subject, some lights too, the link:
    http://www.voxeu.com/index.php?q=node/6846
    Have, all, a nice week-end.

  • cwt334 on 12 August 2011

    Thanks Jim

  • Yclept on 12 August 2011

    ” Lots of investors—individual and institutional—are on vacation and therefore stock market volumes are below normal levels. (For example, institutional investors are certainly watching their portfolios but they’re not rushing to put on new positions.) Those reduced volumes mean increased volatility and bigger swings in stock prices. ”

    Volumes seen this week and last have been some of the highest seen all year. I think this is a case of the “normal” wisdom regarding the market is getting smacked hard in the face with reality. Jim, think before you type!
    Maybe all the Bobos are on vacation, but if they are, the machines seem to be filling in nicely for them.

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