It took 3 weeks for the markets to rally 12% off their August lows and it has taken all of 2 days for them to give up half of those gains. This is a sign that what we witnessed was nothing more than disguised bear market rally. While technically the S&P500 only declined 19% from its May high down to its August low (bear market is defined by a decline of 20% or more from highs) many other indexes and sectors are already in bear market territory and the recent rally certainly resembled one that would occur in a bear market.
Here are just some of the bear markets that have already started: Russell 2000, off its highs by 23%; German Dax Composite, off its highs by 30%; Dow Jones Transportation avg, off its highs by 20%; Crude Oil, off its highs by 26%; Financial sector, off its highs by more than 30%; Hong Kong Hang Seng, off its highs by 20%; French CAC 40 index; off its highs by 25%; Dow Jones Euro Stoxx 50; off its highs by 28%. We could go on if we pleased, but you should get the point. The global market situation is already that of a bear market.
So while technically SPX is not yet in a bear market, with European markets breaking to new multi-year lows yesterday, we feel it is only a matter of time before SPX joins the list above. The fact that the recent rally could not even challenge the bottom of the previous support base (1,250 area) is extremely bearish. Not to mention did you notice where the Dow topped out last week? Right at its break-even point for the year to date. That shows you that big money used the opportunity to exit positions and reduce exposure after they had recovered a good portion of likely losses.
We’ve read many articles recently suggesting that stocks are at their best valuations in years. We can never help but laugh when we read these types of articles. Who’s best valuation? Which model? Are we using history as a guide? If we’ve learned anything about the markets it’s that stocks can always get cheaper just like they can always get more expensive. It will not be until the psychology of fear turns into that of opportunism that stock prices will look “cheap.” Keep a close eye on 1,135 on SPX. That level was the sight of the Jackson Hole low and a break below it will set up a test of 1,120 with further the likelihood of then retesting 1,100 increasing. As for resistance, we suspect SPX will have a tough time battling back above 1,200 in the near future.
Even though we are overall bearish on the market that is not to say we haven’t been adding to positions on some of our favorite stocks. The criteria we are looking for is strictly technical. Up until August, the market had put in two clearly defined lows this past year, in March and in June. So we have been adding to positions in stocks that have managed to remain above their own March or June lows during this recent market weakness. Some of those stocks include LULU, CMG, AAPL, AMZN, CBOU, BIDU, SLW, NG, & AU. We recommend traders take this criteria into account before initiating positions as it can be a good clue to which stocks strong money is willing to stay behind in times of extreme market selling pressure overall.
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