Breathe a sigh of relief over yesterday’s U.S. stock market rally from the brink of breakdown.
But then face reality. With all of the world’s major stock markets—except for the U.S. market–still sinking in search of some support, it’s extremely unlikely that U.S. stocks will be able to hold this ground alone.
Yesterday, May 25, the Standard & Poor’s 500 stock index bounced off of 1040 after an opening sell off. That level, 1040, marks the February low and acts as major support for the index. As long as the index stays above that level, investors can believe that this is no more than a correction. But if the index sinks below that February low, signaling that the market is now in search of a bottom at some lower level, then we’re in for another bout of selling on increased uncertainty and fear.
Yesterday the S&P 500, after threatening 1040 moved higher to close at 1074. That’s 34 points to the good.
Or maybe it’s better to say it’s just 34 points to the good. Because 34 points isn’t much margin for U.S. stocks when all the rest of the world’s major markets have broken below support.
Europe, of course, is in breakdown. As tracked by the iShares MSCI EAFE Index ETF (EFA), European stocks broke blow their February low back in April.
Asian shares have now followed suit and so in the last few days have the world’s emerging stock markets. The iShares MSCI Emerging Markets Index ETF (EEM) is now below its February low too.
Now this doesn’t guarantee that U.S. stocks will join the rout but you can see how much downward pressure the world’s other stock markets apply from a day like yesterday. The S&P 500 plunged at the beginning of trading under the momentum of a selloff in Asia that was followed by a selloff in Europe. By the time trading opened in New York, powerful momentum had built up to push U.S. stocks lower.
The example of yesterday, when good domestic news on consumer confidence and soothing words on financial reform legislation reversed a decline, shows that the S&P 500 index doesn’t have to succumb to this momentum. And U.S. stocks have moved down so far and so fast that a bargain-hunting bounce is likely. Such a bounce could take the index up just short of its April high of 1220 before failing.
But the odds are against the U.S. market being able to hold these levels alone. U.S. stocks need support from a turn in at least one of the two major negative stock market stories—the euro debt crisis or China growth slowdown fears—to stage a lasting comeback rather than a short-term bounce. Unfortunately, I don’t see a turn in either of those stories for months yet.
If the S&P 500 fails to hold at 1040, where’s the next likely stop? The next level, wrote technical analyst John Murphy in his Market Message on StockCharts.com yesterday is 1010 on the S&P 500. That would be a 38% retracement of the gains in the rally. Next stop below that would be 945, he calculates. That’s a 50% retracement and also the May 2009 high.
But remember that just as rallies don’t go straight up hill without a pause, stock market drops are punctuated by small recoveries. I think we’re about due for one.
Of course, so does everyone else who can read a chart. That suggests that any rally is likely to be short because everyone will be looking to sell into it.
EdMcGon,
Its strange to be in the position of being ‘aggressive’ when i am 15-20% exposed to the market but i agree with you. I am only promoting gold for one reason. I have seen these strange relationships develop. First, gold goes up while the Euro went up. It decoupled as the Euro went into trouble. Then Gold went up with the dollar. I can NOT help believing that it won’t be long beforE the dollar is under the sword and at THAT time – i feel i want to own gold when dollar is pressured to weaken severely. (I dont’ know if it weakens under its own burden of debt, wolf shortening, decreased bond purchases but at THAT point – where else can people go?
arihalli,
Be careful with the precious metals. Just look at the charts for both gold and platinum around October 2008, when both of them hit their recent lows.
Platinum went from $2252 down to $774 in less than a year. Gold dropped from just over $1000 to just over $700.
The most conservative play for a crash is 95% cash or bonds, and 5% gold tops.
cjxland on 23 May 2010
arihalli
VEURX is 20% [Grrrowwlll] below recent rally high, and way down in the Secular Bear range from all-time highs 3 years ago. Thinking as an investor rather than a trader, I beleive you would be making a wise choice edging back in now- and I’m with you.
I am wondering if the resumption of the bear markets we are seeing around the world may be harbinging no good for US- investors and maybe particularly traders; maybe giving us a bit of a heads up this time around? Any thoughts?
Cjxland: I think we both live to see the dow passing 9k and then some. I have always felt that the dollar is doomed and that its just a matter of time. The gov’t/Fed has been saying they will end the mortgage credit and the supplements to the economy. And now, predictably, Larry Summers says we need a NEW BAILOUT program. Over 30 states can not pay their UnemployBenefits, Mortgages are getting worse. The gov’t continues its high cost wars, etc. The market is overvalued according to PE. The risk is all to the downside with hardly any possible gains to the upside. Sheer fantasy to me. There is no fiscal discipline. And it doesn’t matter. Because i don’t believe we CAN pay the debts off. I still think that 80% cash, 15% precious metals is the best someone can do. I hope i am wrong.
Sig,
I run one of the bigger shops in So Cal with a presence in multiple Western states. As well, I deal with the Wells, Chases, BofA’s, etc. of the world. I can tell you with certainty, especially considering todays low rates, refi’s are surprisingly slow and purchase apps have fallen off a cliff. My info is “real time”. One other thing to consider, even if apps were not down, CLOSING a loan in today’s environment is akin to donating a gallon of blood. I think you’ll see funding numbers in July surprisingly week. And this is with (I shake my head), 5 and 7 years in the 3% area.
Can you give me a few source twoyrfixed? I’m using the MBA releases. They’ve quit giving the value of the index in their press release, so it’s a little hard to get comparative data yoy, or say, vs. 2005-6. I’s been up plenty the last month, and is highest since Oct. 09–whatever that means.
Sigli,
Actually refi’s are surprisingly not that strong. It’s never been harder to close a loan than it is now. And it’s getting tougher by the day. I only post this to give you info, not to argue with your thesis.
sigli… i agree, there are a lot of things to be concerned about, but there are some glimmers out there and I’m caustiously optimistic. And looking at picking up some bargains.
My own anecdotal research has surprised me here in the last few months on the number of job announcements in my areas of interest. Somebody has more confidence in the economy.
sigli,
Your last para says it all. The Fed is forcing people to go into “risky” investments by keeping such low rates. This is all “reflation” trade here, and will continue, till they say the tightening word.
Plan to cash out before the Fed raises rates
This board has turned pretty negative over the last week or two. There are plenty of positive trends in the American economy right now. I want stocks to go down, but that’s only for a buying opportunity.
Consider: Oil is down–stimulus, refi’s are strong–permanent stimulus, low housing prices + low rates = strong foundation for new households, jobs are on the mend, trends in manufacturing have been great, banks are looking much better, railroad traffic is up, Detroit is rebounding, US ingenuity is alive and well–we’re producing the same amount of GDP with ten million less jobs (maybe we can compete with China), entrepreneurship skyrocketed last year (what’s that about small businesses being the cornerstone of the US economy?), corporate profits are soaring (they’ll have to do something with those profits sooner or later).
The only thing left is jobs, jobs, jobs. They’ll come in time. What happens when states and cities repair and tax revenues rise? Don’t you think there will be a huge rehiring spree? How do you think that will cascade?
I’m not saying to get all giddy, but there’s two sides to the story here. The correction is needed, but there’s no need for a free fall. Besides WHERE’S THE MONEY GOING TO GO? It has to go somewhere, and zero yield isn’t too palatable.
bobisgreen
I am not disputing what is written by ed or yourself. I personally don’t care as much about what the market thinks as much as what is going on in individual businesses or the economy.
As for Geo Politics I can’t predict. Not that smart.
I follow advisors and some are not as negative.
Ed,
Great comment on Europe. Maybe they’ll go for something drastic.
I’d love to see that 1200 level again as well (I’d be selling about 1/3 into that rally).
Still on my thesis we are range bound…. But definitely see the possibility of falling off the cliff…… Need to get through that 200 day MA to feel a bit safer
dgoedken
Would they have calculated that in their estimates?
Ed,
I like #1. That would be a start, throwing Greece under the bus. One has to ask how much patience fellow “corruptees” have for one another. On #2, the corrupt like to hold onto power, not give it up.
ogowan,
I applaud the nice numbers; however, the markets are too bearish to care. They want something to happen globally to ease fear (Ed’s 1 & or 2). There’s enough negative motivators (Ed’s 1 – 5 of previous post), at least possibilities, that have a dark cloud over sentiment (like the peanut’s character).
It might be wise to use these next few trading days to take some profit, sit back and spear select opportunities.
ogowan: I suspect it is related to the flurry of contracts which had to be signed by April 30, but need to be closed by June 30th for buying a home and getting $8k from the taxpayers. Depends on the date range taken into acct. for those figures
Home sales better than expected. That will help future durable goods orders. More whirlpool washers for the home.
grindy2424,
I think a true resolution of the EU problems would be enough to send the markets back to highs quickly. Unfortunately, that would require one of two things to happen:
1. Greece leaves (or gets kicked out) of the EU.
2. A true agreement between all the EU members to grant more fiscal power to the EU.
I don’t consider either of these likely any time soon.
Ed,
What do you see would need to happen to take the markets through the 1220 high?
Hope you don’t feel like I’m questioning your knowledge (I respect you and Jim immensely). Always good to learn more about peoples position to improve my knowledge.
mopama,
I consider Germany as part of the Europe problem. They didn’t cause it, but they can certainly make it worse!
Gravity: It’s easier to go downhill than it is to go uphill! Notice the ease at which markets go down…and the effort and strain it takes to go up! Ed, 1 – 5 are gravitational moments. Good economic news is the #$%^ shoveled against the wind of 1 – 5. It’s a bad time to have a shovel in your hand, much less use it!
Ed, I believe you forgot Germany. If, they will decide to pull out Europe, it will be only the third time in 100 years that they ‘killed’ Europe and them self with it.
grindy2424,
Take a moment and consider all the possible things which could cause the markets to plummet:
1. Europe – As Jim has stated before, we could be playing this one out for years. But all it takes is one significant mis-step by anyone involved in it (and there are many players in this one) to send the markets rocketing down.
2. China – If the Chinese government came out tomorrow and said they weren’t planning on taking any further economic measures until next year, the Chinese stocks would skyrocket. Unfortunately, we all know the possibility of some kind of Chinese economic tweaking is all too likely.
3. Israel-Iran – If you follow the news coming out of the Mideast, the likelihood of a conflict between these two nations (which would also bring in Syria and Lebanon) is becoming greater every day.
4. Korea – While history tells us that North Korea likes to rattle it’s sabres at least once a year, it is unusual for them to actually sink a ship in the process. While I tend to discount this one as a likely market-mover, since I think it will mostly result in a lot of diplomatic talking with nothing real happening, it is at least possible for the two Koreas to go into an armed conflict.
5. The U.S. – All it takes is a few weak economic reports at home to rattle the markets. By the way, think of all the small businesses which have been affected by the Gulf oil spill: That is economic activity which will NOT happen.
Pick your poison. I won’t say all of these will create market crashes. But all it takes is one of them.
OECD meeting. Will see what it will bring us:
http://www.oecd.org/document/49/0,3343,en_2649_34487_32618737_1_1_1_1,00.html
Ed,
What makes you so bearish here?
I think there are some good things in the report as well as some bad. It definitely depends on how important you think transportation spending is.
Jim is right on with his analysis on what it takes for the market to march higher. I just see the market being more range-bound until the China situation is so clear.
Hopefully new home sales will have a better number than durable goods orders.
grindy2424,
Take a closer look at those durable goods orders. Excluding transportation (i.e. airplanes), they dropped 1%. Read it as you wish, but I call it a bad short term economic sign.
Everyone else,
Listen to Jim on this. The stock futures are up today. Sell now, or expect your losses. The bear train is about to leave the station, boarding now. 😉
Jim,
I think the strength of the US recovery might add some support to the rest of the market. I would say odds are for it. Solid durable orders at 2.9%. Expecting to see a good pop in some of the oversold areas.
As far as China I think they are bit closer to turning the corner. I could see the index finding bottom here and making a move. Been reading research and China is a bit better at soft landings (or they can say whatever they want to control the market) than other countries. Will be interesting to see how it plays out