End of the Bear Market?
- The ‘end of the bull market?’ That was the question of the day on the financial stations.
- The news was not great but was it really that different to warrant a stock market rollover?
- Jobless claims still below 400K, but that was not good enough for investors, at least on Thursday.
- China suffers a $7B trade deficit, sparking speculation of a global slowdown.
- Copper hits a 4 month low as Chinese imports fall 35%
- Saudi Arabia ‘hit’ with all of 200 protestors. Better break out the artillery.
- Technically does this action merit calls that the bull run is over?
- Take care of business as usual: protect positions, look for opportunity, be patient.
MARKET SUMMARY
A little adversity and some are set to throw in the towel.
This is the definition of a gap. Futures were down sharply at the open, and they whittled away further into the bell. Stocks did manage to rise, but they never came close to positive before peaking at lunchtime and rolling over. They sold off to impressive losses at the close. There were 2% losses at one point, but they were able to bounce in the last hour to cut those losses to just above the 2% level. NASDAQ, -1.8%; SP500, -1.9%; Dow, -1.9%; SP600, -2.5%; SOX, -2.5%; NASDAQ 100, -1.65%.
This gap lower had the financial stations in a titter. There was a lot of news causing concern. Jobless claims came in at 397K. Not bad and still below 400K, but that was not good enough when 382K was expected. Futures did not get any relief when the jobless claims were out. The trade deficit was also worse than expected at -$46.3B versus -$40.3B dollars the prior month. Lo and behold, China had its own trade deficit of -$7B dollars. Rising import prices (oil is even hitting the Chinese) and a reduction in its exports caused the trade deficit. That rattled the cages of everyone across the world. If China is slowing down, they wondered how any other nation could possibly survive. A bear market must surely be coming or at least the bull market is ending.
That makes a lot of sense given that the economic data continues to improve. Even though the improvement is not too great, it is sill improving. That makes sense considering the liquidity train is still running at full tilt. Ben Bernanke is pumping $77B dollars a month into the economy, and he says he will not stop. Liquidity is still coming in, yet the market run is over. That does not make a lot of sense. Some day it will end, and maybe it is just anticipating the end of the liquidity pump. Likely not just yet. The money still has to go somewhere when it is pumped into the economy and not used by the economy.
Spain announced that it was having a credit downgrade by Moody’s. Oh, perish the thought! We all knew it was in trouble already; this is no big deal. It got reduced to AA2. Its credit is still okay, but everyone knows it is not really any good. It is illusory, so it would not make any difference what Moody’s did.
There are more air strikes in Libya, and it does not look good there. There is no production coming out of Libya at all, and surely that will drive oil ever higher. Oil was not up on the day, however.
Copper is declining. It hit its lowest levels since mid-December. Imports in China are down 35%, and that is significant. That was a cause for some concern.
There was unrest in Saudi Arabia. The “Day of Rage” is coming tomorrow, and some protesters were out early, hitting the streets and causing utter bedlam in the country. I think they reported over 200 protesters in Saudi Arabia. My goodness, how does the government have a chance of standing with that kind of onslaught? Surely it cannot stand the violence and the hatred that must be rising against the ruling class. 200 people. Of course they had to break it up and fire rubber bullets into the crowd. I mean, you cannot have 200 people in Saudi Arabia protesting you must put an end to it. At least they did not cut their heads off. I’m sorry, that was a tacky thing to say. But you get my point.
The news was not great, but it was not that bad. End of the bear market? It may be, but does this information and this action in the stock market say that is the case? I don’t think so. About the only thing you can draw from a study of the technical picture, and even the economic picture, is that the markets had a good run. There has been a lot of liquidity pushed into the financial markets (whether stock or otherwise), and they have rallied. They have had one significant base, and they are rallying out of the next base.
Again, if you think the liquidity train is stopping, then that may be a reason for the market to fall. Now we see a pullback that is not too different from what occurred in November of 2010. This one has a few bigger and steeper days to the downside whereas here we had three that were not as big. Yes, the SP500 broke the 50 day EMA for the first time since way back in 2010, but it has not been a total collapse below that level yet.
It may still do that. It could come down easily to these levels from December and January (near 1270) without much issue. It also has something of an ABCD pattern that could be setting up. There is often a false breakout when there is a break to the downside. When everyone thinks the end is near it reverses. I am not saying that will happen here, but I am saying that it is too early to proclaim the death of the bull market. Yet many financial stations were discussing this in hushed and worried tones on Thursday.
As noted, it was not a good day for any of the indices. They were down over 2% across the board before a late bounce helped mitigate some of the damage on the large cap indices. Nonetheless, it was an old-fashioned tail kicking. After this kind of rise, however, and given the kind of news that we have on the world front, is it any wonder that there is some selling? It is nearly a miracle that it has not been worse at this point. Like I said a few weeks ago, it is a triumph of the liquidity hypothesis that the market has been able to hold up so well given so much negative information.
As you can probably tell from those comments, we realize that the economic “recovery” is perilous. It was perilous even without $100+ per barrel of oil. The market rise is perilous because it has been driven not by a surging economy. Some of it has been pushed by an improving economy, but the primary reason the market has had the best rally in history since the Great Depression is the trillions of dollars pushed into it. All of the stimulus and “investment” in the country is not actually going into the country. The big companies that got the stimulus money used it to pay their dividends and make sure they had job security for their employees and by employees I mean thousands of VPs and what-have-you at GE.
No, it never hit the economy. This is money that was pushed in to help the banks make money and recapitalize themselves so they did not totally collapse and drag the entire world economy down with them. I am digressing a bit, but you see the point. This is a liquidity-driven move. The liquidity is still in place. The economy is still improving. It may be premature to say it is the end of the bull market simply because the SP500 closed below the 50 day EMA for the first time in almost a year.
FRIDAY
There is some important economic news. February retail sales are out before the open. Michigan Sentiment comes in about a half hour into trade, followed by January business inventories. Inventories at the wholesale level rose, and they also showed very high sales levels. There are businesses at the wholesale level stocking up because they are seeing a lot of sales and feel they will continue. They are keeping their inventories stocked up as well.
That is a positive for the future, and we will see if business inventories can do the same thing. These are the guys buying from the wholesalers and putting them in their inventory for want of a better word. They are preparing to sell them. If they are ramping up their inventories, that is great. I do not know if that will be the case, however.
Remember, when talking wholesale inventories, we are talking about the hoarding and stockpiling of raw materials. That has been one driver of scarcity in the market in helping further hike the prices with respect to inflation. I don’t know if we will see this on the actual business level. Wholesale, yes; but businesses are not buying as many raw materials. We will see how that works. In any event, important data will be out in addition to the usual story about what is happening with oil prices, with the Middle East and North Africa, and even here in the US.
Interesting to note that oil was ready to fall. It was down over $3.00 and was ready to give back some of these gains. It would be enjoyable to see it come back, and it may help with a few pennies at the gas pump. The problem is that more unrest drove it back to the upside. We will have to see how the “Day of Rage” in Saudi Arabia plays out. It could be a nonevent or there could be another 200 people that the police and military have to disperse in order to save the kingdom. 200 people it has amazing what they can do in a small area when they are being shot at with rubber bullets. But I digress.
There is important news, and we will watch how it plays out. That is how it is every day. Technically speaking and this is where it gets more interesting we had a good tail kicking on Thursday. There was a good tail kicking on Monday as well that brought the SP500 and Dow down to their 50 day EMA. The SP600 is holding right above it. After such a beating, I think the market will bounce toward the weekend.
There is a bit of short covering. We could use that to close some positions that are struggling and that may not bounce with the rest of the market. We will also look for some downside positions that gapped lower on Thursday and may not have given us the most opportune entry points. If a rebound comes back to a resistance level, however, then we can use that to move in. I would not have much of a problem with that, and I don’t think you would either.
JEC is one that gapped lower. It could bounce back up and test that gap level and probably give a good entry point. We will be looking for those as well. I do not think the selling is necessarily over. I talked about the fact there would be an ABCD pattern on the SP500 setting up. It likely would not hold right at the B point. It would want to come down and test the late-December peak and the January lows. That would be a more opportune and appropriate level for such a nice, long run in an ABCD to form after that.
We could still get some more downside, and we would like to take advantage of that. We took some gain off the table today on our downside plays such as X. It gapped down to a doji. It gave us a nice gain on that play. SNDK gapped down and gave a nice gain. It held right over the 200 day EMA and hit our target. Beautiful. Very nice run on those downside plays.
Now we see if they bounce and if the other stocks bounce. That is basically where we are right now. It is a selloff, and it is one that a lot of people think is the end of the bull market. That kind of sentiment is an advantage. It may not be a short-term positive for the market, but over the next week, two, or three, it will help set a bottom. We will see if it can bounce up off a nice ABCD pattern off of the SP500.
In sum, we are at a point where there is selling. No doubt the sellers are taking control and pushing things lower. Is it the end of the bull run? I do not believe so, but it may be. We have to protect our positions to the upside as if it may be the end. The market will do what the market wants to do regardless of our gut feelings about what it SHOULD do.
We will protect our positions as we have been, again noting that the bat was taken out of our hands on Thursday when stocks gapped down to the 50 day EMA. A bounce off of that level will give us a chance to close some out if we desire or at least take some positions off the table. If we want to let the rest ride, that is fine.
It will give us a chance to do that, and it will also let some downside set up that we can take advantage of while we wait for the market to finish this pullback. If it does and we see good stocks still holding up in good position and the 50 day EMA a very good place for a stock to hold then we can move in when the stocks look right and the market starts to break to the upside.
You have to be patient and let them come to you. You have to protect yourself at the same time. We will do all of that as we see how this correction plays out. Remember, this is something we felt was coming. It was no surprise. We keep seeing good stocks holding up, and that is a positive. If they crack and break down, then the complexion and the character changes. For now, this was totally expected given the run we have had to this point, given that it needed another correction similar to November. It is getting that correction similar to November.
Remember, even though it was a sharp downtrend on Thursday, there was still more ground lost in the November correction than there has been in this one thus far. Keep that in mind when you start mulling over whether this is the end of the bear market based simply upon Thursday’s action. Have an excellent evening. I will see you on Friday and we will see what shows up in the market.
Jon Johnson
