The S&P 500® has corrected up to 19.6% from its high of 1,371, on May 2 to last week’s low of 1,101 on August 9. That puts us on the edge of bear market territory, a drop of 20% being the “official” mark..
The market keeps flirting in this area and has not confirmed a solid bullish or bearish bias. Investors Business Daily who publishes market turns has changed their bias from ‘market in uptrend’ to ‘market under pressure’ several tiems in a week. So which way are we going to go?
Did the bull market that started in March 2009 with the S&P at 666 really end at 1,371?, (A gain of 100%), and we are now in a bear market?
Or should the almost 20% decline into August 8 count as more of a sharp correction in the same way that last summer’s 17% drop counted and we went back up?
Your probably wanting to read on for the answer to this but it’s too early to tell. Trading is not ‘predicting’ but buying and selling along with what the market does. But what you might ask yourself is if the 2008 Global Financial Crisis was the main event and this summer’s decline were corrections and therefore buying opportunities? Or are we still in the throws of the crisis, and we are just experiencing a continuation of the crisis as it gets worse.
Gold, has been the current contrary trade to stocks. In the previous article on gold it shows a chart of both and they are mirrored images of each other. Colorado company stock Newmont Mining (NEM), is in the throws of this. As NEM broke down early last week stocks rallied, then Wednesday gold stocks caught a bid and they have seesawed back and forth since.
The bullish case
One could make the case that this is only a slowdown and that the crisis in Europe is an aftershock that must be dealt with. Once Europe finally addresses it directly the market could be up again just like it did a year ago.
U.S. GDP growth is positive though very low, jobless claims are down to the 400,000 level, and retail sales have been increasing, (but with weak consumer confidence surveys). Oil prices have come down under $90 a barrel and the Fed just committed to two more years of low interest rates.
Leading indicators still show some life and the yield curve has not gone flat or inverted which has always happened before a recession.
The majority of US companies that reported earnings this past season beat their estimates and have good balance sheets.
Technically the market has been very oversold and sentiment is very low. There are as many bears as there are bulls, and depending on individual survey more bears than bulls. (This is a contrary indicator and it actually bullish.) The DSI index, which measures bulls and bears among futures traders, reached a mere 4% bulls trading the S&P 500. That’s the lowest since the March 2009 bottom. Last weeks 635 point drop was noteable.
Furthermore, the S&P is trading at an earnings yield of 8.8% and a forward P/E of 11.2 times as of last week. That’s pretty cheap by historical standards; the long-term average is around 15 times earnings. The market seems to have priced in something worse than a correction / slowdown, and the point here is if that is all that happens stocks are a bargain.
The bear case
The bear case is that the global financial crisis is still eroding world markets and was just in remission because of the aggressive U.S. fiscal and monetary stimulus, as well as China’s massive stimulus. Now that the fiscal stimulus is turning into austerity, and the most of the monetary stimulus bullets have been fired, the market rally that we have enjoyed is ending as the crisis resumes.
The U.S. economy has fallen back below its 2% stall speed, which means it may be growing too slowly, and, without more stimulus could fall into recession. (2% is the arguable level of GDP it takes to promote hiring.)
The Fed has already announced two more years of low interest rates. QE2 lifted the stock market for a while, but it also lifted inflation slightly and the economy did not respond. And we cannot do much for the similar problems in Europe and European policy makers have not moved towards a real fix.
The ECB only has a single mandate: price stability. Our Fed has a dual mandate: full employment as well as price stability. So in Europe, the ECB has focused on inflation even while the economy has been slowing dramatically, especially with the fiscal austerity being imposed on nations like Greece and Ireland.
The Greece debt problems have spread to Italy and Spain. A 440 billion Euro package was approved for Italy and Spain but it may not big enough. The political will to increase involvement may not be there. The Merkel and Sarkozy meeting produced little substance. So the can is just being kicked down the road.
A possible fix for Europe has been touted to issue common Eurobonds. But this requires all countries to agree. The markets are impatient and that’s why there has been so much volatility.
The real danger to the countries that are deeply indebted (U.S., Europe, U.K., and Japan) is that they could reach a point that they may be unable to grow their way out of it.
So very low growth or recession in the United States, along with coming fiscal austerity, and a Fed that is almost out of ammunition spells ‘bearish’ . Add to this the threat of Europes growing problem and the fact that China is trying to slow their economy and therefore is not stimulating.
Europe is slowing dramatically. Greece and other areas on the periphery are at or near recession. Meanwhile, France showed flat growth in the second quarter and Germany grew at only about half a percentage point. All of this raises the risk of a global recession.
So its your call. What do you think? Traders and investors everywhere are confused with fundemental data pointing every direction. For technical traders things are no more clear fundamentally but they seek to have an edge in what the stock market is doing at the present. It is refered to as staying ‘in the moment’. At some point we will have our answer to all the above questions as the market breaks out into a smoother trend. For sure this will be an easier market to trade and invest in.
For now though those seeking to make money trading will face the frequent volatile seesaw of prices and it will take a plan to know just when to enter and exit.
Trade with a plan.