The late January correction is upon us. I hope none of our readers are surprised. We've been talking about this very real possibility for weeks now. It showed up about one week later than I expected but a week earlier than Jim expected. I'm going to keep this commentary brief. We already know the news. By and large investors have been selling the earnings news without regard to the results. This past week the correction received its own "stimulus" package with very bearish talk about new rules for the banking sector coming out of the White House. Our challenge now is deciding our strategy.
You've probably heard people talking about the 1085 level on the S&P 500. This level was support in late November and early December. The market is very short-term oversold. Odds are pretty good we could see a bounce near 1085. However, it would only be a bounce. I suspect this correction will take us toward the 1050-1035 zone. Corrections are typically -5% to -10%. A 10% pull back for the S&P 500 would be near 1035. If stocks overshoot to the downside we could see the S&P dip toward its rising 200-dma near the 1,000 level. This is going to be a multi-day process and could actually take a few weeks. What does that mean for us? It means we need to be patient with our entry point.
We've been waiting for this correction as an opportunity to enter new long-term positions. There is no need to rush into a trade. We don't have to buy the first dip. Our time frame is 12, 18 or even 24 months for some of our trades. We've got time.
Taking a step back and waiting for the dust to clear is not a bad idea. The recent volatility could be a sign of things to come. We've got an FOMC meeting this week and an FOMC chairman who's job is suddenly in jeopardy. Yes, Ben Bernanke may not get confirmed for another term. Wall Street HATES uncertainty and while many like to point fingers at Bernanke he is a known quantity versus the unknown of who would take his place should he not get confirmed. Back to the FOMC meeting, no one expects the Fed to change rates so the focus will be on their comments about the economy. Odds are it will be a bland report as Ben tries not to rock the boat ahead of his confirmation deadline.
Overall economic data this past week has been mixed. We're still seeing some improvement in the U.S. but weekly jobless claims have started to climb again and that is definitely a bearish signal. Investors are going to be focused on the next jobs report come February but prior to that the focus will be the GDP report this coming Friday. Currently Q4 GDP estimates are for +4.4% growth in the U.S. If the GDP number disappoints stocks are going to react negatively. Remember, it's my opinion that the GDP surges in Q4, stays positive for Q1 and probably Q2 and then begins to slip again for our double-dip scenario.
Speaking of GDP, China just announced their Q4 GDP growth of more than 10%. The actual number was a slightly less than expected but the country is red-hot. The authorities are trying to tap the brakes to keep inflation under control and keep the economy from overheating. Rumors and talk that China told banks to stop lending in January or raise their capital levels damaged investor sentiment. Now the worry is that China is close to raising interest rates. The big picture is that China is trying to slow down demand and for a world struggling to rebound from a global recession that's not good news, especially since China is a crucial component to the rebound.
Put it all together and we have a post-earnings sell-off, concerns over the future for the banks thanks to populist politics from the White House, concerns that China is trying to slow down their economy, and now add to that very real worries that Greece could default on its debt, which could spark a domino effect. If Greece falls then countries like Ireland, Italy, Spain and Portugal could default. The euro has been sinking on fears of a default and the future of the 16-country euro zone is in doubt. We've got a pretty good storm to put investors on the defensive. Take your time and plan your trades. Let the stocks come to you.
Chart of the S&P 500 Index:
Weekly Chart of the S&P 500 Index:
Chart of the Russell 2000 Index:
Chart of the NASDAQ Composite:
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