Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
U.S. indexes are bouncing some this morning in the premarket after yet another poor session yesterday. After sharp selling in the morning, buyers stepped in yet again to rally the indexes, but it only led to a late day selloff which pushed the S&P 500 below the all important 1340 level by a smidge. That sort of action is dispiriting for the bulls, and I am not sure how many fingers they have left from knife catching. NASDAQ 2900 did hold at the end of day after breaking fractionally in the morning.
While the indexes are oversold they are not at extreme levels despite the selloff the past week and a half, simply because almost every day we have buyers attempting to come in intraday. The pattern has been gap down on Europe, buyers step in mid day, buyers get faded to some degree. This negates the ability for a ‘flush out’ type of situation which traditionally foreshadows a more tangible bounce (within a larger selloff). We would want to see a ‘void’ where buyers are not willing to step up and then an exhaustion of sellers – but the market complexion is not there yet.
Below is the % of S&P 500 stocks below their 50 day moving averages – while at an extreme for 2012, it is not an extreme within the context of the past few years.
That said, the same groups I outlined last week ARE at extreme oversold levels – many stocks within these sectors have relative strength indexes at 30 or below, and are also below their lower bollinger band. This at the same time the U.S. dollar is up 11 sessions in a row (thanks euro!) and above its top bollinger band. So in sum, we have an overall market that is oversold but not at an extreme level with a few of the ‘global growth’ sectors (many of which were the leadership stocks of January 2012) falling off a cliff.
Larger picture we continue to see fewer and fewer names being able to hold off from the selling; there is a rotational aspect to where sellers are going and what was holding up say early last week finally relented late in the week or yesterday. In the end the stock market is a market of stocks, and the technicals for more and more of these individual stocks are deteriorating. Again, this does not preclude a sharp ‘dead cat’ bounce – in fact, a substantial gap down open today followed by some ‘panic selling’ would have been such a set up, but the market does not make it easy on us.
Key levels are 1340, 1347 (floor from last week, outside of one gap down), 1351 (the rising 100 day moving average which supported the market last week), and then above that the ‘box’ from 1357 to 1393. Yesterday’s lows of 1336, then 1320 and 1300ish to the downside. The Rusell 2000 is in worse shape, as it has been all year. We are seeing some ‘head and shoulders’ patterns developing in the indexes, which is not a positive in the intermediate term. Long story short, we are in a “boring” area (I don’t mean news flow, I mean in terms of activity) where capital protection is job one, and we need this correction to play out – of course there are a lot of macro factors that are dominating the news, but by doing nothing other than looking at the price action, we are somewhere in the 3rd to 5th inning of a correction. How far it goes we have to see and adjust to over time. When there is a sustained move to the upside that lasts more than 3-4 days, there will be plenty of time to get in the pool.
On the economic front retail data this morning stunk, but it is most likely influenced by ‘seasonal factors’ that the government uses, which overstated the data during the warm winter/early spring. So we’re ‘giving back’ some of those distorted gains. CPI came in flat, which those who love QE should be very happy about – while not the main inflation gauge the Fed uses, it’s the most visible one. Remember, the Fed can continue to shoot its bazookas as long as there is no inflation (or at least government reported inflation).
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
