The seemingly unstoppable market rally suddenly looks vulnerable. The combination of headline trauma and stress are finally wearing down the bulls. Bears smell blood in the water and they have begun to circle. With the major U.S. averages up more than 10% from their February lows without any sort of significant consolidation the shorts know a correction is coming.
I suspect that investors have been beaten over the head with too many headlines this past week as we rush from healthcare to Greece to Korea.
It was just a week ago that the fervor over the healthcare vote had reached a fever pitch. The vote occurred. The bill was passed. Healthcare stocks spiked higher on Monday and reversed in a classic sell the news move. As one crisis faded another took its place.
The Greece situation came to a head. The Greek prime minister threatened to go to the IMF for help, something EU regulators did not want, especially France. There was a hidden battle between Germany and France, the two largest EU economies. France holds a lot of Greek debt so they don't want them to default. Germany has no taste for a bailout using their tax payer funds to bail out a nation they feel is lazy and corrupt (not my words). In the end a compromise was reached that included bilateral loan agreements and IMF involvement as a last-ditch safety net for Greece and any additional countries that may be struggling. The two-day meeting in Brussels was not just about Greece. The EU is worried that Spain, Portugal, Ireland and Italy are next in line.
As the Greece situation appeared solved there was another flare up in the East. On Friday a South Korean navy ship exploded and sank off the west coast of North Korea. Reports claim the S. Korean ship exploded from the rear and from under the water line, which certainly sounds like a torpedo. Yet news reports quickly down played the event as a threat from N. Korea and focused on the rescue efforts. Stocks reversed their morning gains on the report and the market never really recovered.
I suspect that investors were happy to have another excuse to sell stocks. The market is up huge in the last eight weeks and the pressure for money managers to perform has been hot. The question is how will they finish the race with just three days left in the first quarter?
Imagine the market, a weary racer, nearing the end of a marathon. They can see the finish line. Some racers will find a last bit of energy to sprint across the finish. Others are merely happy to stumble across the line grateful the race is over. I suspect that we could have a stumbling finish for the quarter end. Trading action these past few days has been weak. Volume was low. Traders were selling into strength. We have a series of failed rallies. The bullish camp can argue that there was no real follow through to Thursday's bearish reversal but I wouldn't open new bullish positions on that idea.
We could end up seeing stocks slowly drift into the first quarter end. Then the correction could begin. Fund manager pressure for performance will ease. The market's focus will return toward economic data and the next earnings season. Speaking of economic data we have a very full week ahead of us. A few of the highlights will be the Case-Shiller home price data, consumer confidence, New York and Chicago ISM numbers, the national ISM manufacturing number, the ADP employment report on Wednesday and the non-farm payrolls (jobs) report on Friday. The biggest report of the week will be the jobs report and yet the market will be closed for good Friday.
Expectations for the jobs report are positive with growth around +300,000 jobs yet more than a third of that number could be temporary jobs for the U.S. census. Professional traders will know that jobs numbers for the next few months will be artificially inflated by the census but how till the market react? Will investors hold over the three-day weekend? If the jobs number disappoints then stocks could gap down on Monday morning, April 5th.
Traders need to be careful. The market is up big. The rally looks tired. Stocks are lacking a new catalyst to drive them higher. Now maybe things will change with a new week of economic data but we know the focus will be on the Friday jobs report and that could keep any further rally in check. Be patient and let the market come to you. There is no need to chase it here.
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