Decision Time for Traders
Despite the overtly negative news backdrop of the last few weeks, the dip buyers have been fairly resolute in their plans to buy each and every decline in the stock market. However, given the horrific scenes from Japan, which was hit first by the largest earthquake in 140 years, then a massive tsunami, and is now dealing with the possibility of multiple nuclear reactor meltdowns, it would appear that it’s decision time for the bulls.
No one would really blame those in the glass-is-half-full camp if they decided to take a wait-and-see approach to this market. After all, the questions relating to the impact from the Libyan uprising, rising oil prices, European debt, a potential slowdown in China, and now the unknowns relating to Japan are many at this stage of the game. And with the indices perched on the edge of very important support zones, it wouldn’t be surprising to see the bears take control for a while.
The chart-watching crowd apparently has some support for prices heading lower in the near-term. According to Bespoke Investment Group, when the indices have spent more than 100 days above their 50-day moving averages and then dipped below them, the market has tended to move lower. Going back to 1971, Bespoke found that the NASDAQ proceeded to lose an average of -5.6% over the next month and then -4.7% over the next three months. The S&P appears to fare a little better in this scenario, having lost just -1.9% a month after slipping below its 50-day and -2.1% over the next six months. So, although the S&P did manage to poke its head back above the apparently all-important line in the sand, history suggests that the bulls may decide to take a break in here somewhere.
On the oil front, it’s also decision time for traders. While the supply of crude has been interrupted from Libya, it appears that Saudi Arabia and the rest of OPEC can easily pick up the slack. Then when you mix in the slowdown fears in China, the earthquake in Japan, the talk of speculators being responsible for a big chunk of crude’s rude rise, the nearly universal expectations of the talking heads for oil to only move higher, and the almost instantaneous reaction of the U.S. consumer to the situation in MENA, one has to wonder if perhaps oil might be headed lower in the near-term. That is unless the organizers of the “Day of Rage” can make a better showing next time in places like Saudi Arabia.
Unless the bulls can manage to return their focus to the big-picture – and right quick – the individual investor may also be faced with a decision. As you’ve no doubt heard, the public has apparently decided that after a 95% gain in the stock market, it’s time to jump back in the pool. Recent data from Investment Company Institute, which is the official scorekeeper of funds flows, shows that investors have moved $33 billion back into mutual funds since January 1st of this year. According to ICI, this replaces the $31 billion investors had pulled out of equity funds between March 2009 and the end of last year. Thus, given the shellacking the public has taken in funds over the last decade, it may not take long for John Q. Public to reverse his decision to get back into the game if prices start falling again.
So, if you find yourself on the fence about which way this thing may head from here and are feeling like it’s time to make a decision, know that you are not alone. However, keep in mind that if the bears can conjure up a reason to push the S&P below Friday’s low, traders may have already decided what comes next.
Turning to this morning… With a second explosion at the Fukushima nuclear site in Japan and the likelihood of an all-out meltdown rising, traders are a little tense this morning. Even the Eurozone’s decision to increase the level of the EFSF bailout program, which is helping debt spreads in peripheral European countries, has not been enough to get the bulls back into buying mode in the early going. However, with oil now under $100 again, it will be interesting to see if the buyers will return as the day progresses.
On the Economic front… We do not have any economic data scheduled for release today. However, the flow of data will pick up later in the week.
David D. Moenning
Editor: The Daily Decision
