Investors need to be careful here. The long-term trend is still up but we're starting to see a lot of fragmentation in the market. Significant sectors in the market like financials and small caps have been under performing. We're seeing a lot of bearish reversals and failed rallies and quite a few bearish head-and-shoulders patterns are forming. Of course these aren't guarantees that stocks will turn lower. One of the S&P 500's biggest rallies was just last July when it reversed higher from a bearish head-and-shoulder pattern, which fueled massive short squeeze for several days.
I find that the tone last week was somewhat encouraging. It seems that traders are ignoring bad news and only choosing to focus on good news again. That's a tough market to be bearish in. Did you know that last week Realty Trac said there were more than 320,000 foreclosure notices filed in October? It didn't get a lot of play in the media. October was the eight month in a row that foreclosure filings came in at more than 300,000. Eight months ago 300,000 was an all-time, historical high for foreclosure filings. Now it's ignored by the market. Regular readers already know my bearish stance on real estate so I won't bore you with it tonight.
Let's take Friday's consumer sentiment data as another example. Economists were expecting a rise from 70.6 in October to 71.0 in November. The University of Michigan said their survey of consumers showed a drop in sentiment to 66.0. What did the market do? It shrugged it off. The data for this consumer sentiment was taken before the last jobs report revealed that unemployment had hit 10%. It would be easy to think that consumer sentiment has sunk even further given all the press about double-digit unemployment.
Sinking consumer sentiment is fundamentally bearish for retailers. Just don't tell the retail stocks. They're in rally mode. The RLX retail index hit new 2009 highs last week. We are going to hear from several more retailers this week when they announce their third quarter earnings reports. It will be interesting to see if investors continue to ignore bad news.
I'm going to keep my commentary brief tonight. Essentially I'm concerned by the relative weakness in small caps. Big caps are out performing because fund managers are nervous and it's easier to get your money out of large, liquid big cap names if you need to retreat quickly. I'd like to see the S&P 500 breakout over the 1100 level before committing any new capital to the market. A lot of the bulls out there are looking for a rally to 1200 or higher. I'd probably wait for the S&P 500 to close over 1105 or 1110 before putting any more money to work in stocks.
Chart of the S&P 500 Index:
Weekly Chart of the S&P 500 Index:
Chart of the Russell 2000 Index:
LONGER TERM OUTLOOK
Previous Comments on my Long-Term Outlook:
My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.
~ James Brown