It was impressive while it lasted. The S&P 500 managed to remain above it’s 50-day moving average for five days before succumbing to a sell off in the last two sessions – a pull back that has not only retraced most of last weeks’ Monster Monday rally, but has closed below the difficult-to-dominate 50-day moving average.
You will hear on the news and read in the headlines that the government’s balking on the automakers restructuring plan or the need for more bank bailout money is the reason the market fell today, but if you followed our updates last week the writing was on the wall.
The market was technically overbought to the extreme, and has been for many days. Any reason at all could have been given for the sell off during the last two sessions.
My personal thinking is that the news on the automakers was more positive than negative. The automakers need a real good excuse to be able to negotiate more sternly with the unions, bond holders and creditors. They got it today, when the administration refused to accept the automakers’ restructuring proposals.
To the viewing public, it should have been a breath of fresh air that for once, a no-questions-asked bailout was turned down. The public is growing weary of trying to solve every business problem that comes along with a basket of money.
And yet the stock market chose this comparative good news on the automaker’s troubles as an excuse to take profits.
A more meaningful reason for the recent sell off might be what Geithner had to say last Friday and over the weekend on the Sunday news programs regarding the mighty big holes that still exist in the banking system – holes that the administration remains convinced can only be filled with more and more money.
You see, the $700 billion TARP funds are almost gone. Geithner admitted that only $135 billion remained and that a number of banks will need a great deal more to achieve sufficient solvency to not threaten the US financial machine. There is no question than the current banking system has turned more than rusty since coming to a halt over six months ago. Realistic estimates to fix the financial system are in the several trillions of dollars.
One could easily make the argument that the entire banking system could have folded up, gone away, and the trillions of dollars of bailout monies could have been used to set up a completely new banking system that would be devoid of “toxic legacy assets” and have boatloads of cash to lend.
Don’t you love the new “legacy assets” moniker the government is starting to use rather than “troubled assets” or “toxic assets”? Why politicians think they can put lipstick on a pig and decide it looks so much better is beyond me – and the opposite side of the aisle is letting this one go, too. Clearly, both parties are in bed on this one.
And there’s the real rub. Blue collar workers in the largest US manufacturing industry are being told to get a little thinner – that the $20-$50 billion needed to keep them going is just too much to ask. And while I agree from a philosophical viewpoint that bankruptcy and re-negotiated union contracts and pension programs are the only real long-term salvation for the dying U.S. automotive industry, I venture to say that thousands, if not millions of workers in the extended automotive industry feel differently and are quite bitter about the preferential treatment given to their white-collar counterpart failures in the banking system.
The differential in magnitude of dollars committed to these two too-big-to-fail sectors is breathtaking.
The tone appears set for the week with chances for another week of gains at very low odds. Short interest has already taken off again, particularly in the financial sector. This strongly suggests that much of the March rally was short-covering that lasted much longer than usual, as short positions were pressured over and over again. But with a consistent return to short interest, the long-term confidence needed to sustain a bullish trend may not be there yet.
This financial weakness is global in nature, as Spain announced today that their government has taken over a major Spanish savings bank and their country has just experienced a year-on-year decline in consumer prices – the first European country to declare such news.
Should the S&P 500 remain below its 50-day moving average once again, then a retracement decline and possible test of the March lows could be on its way. I am doubtful that the March lows will be extended to the downside with new bear market lows and feel that the strength of the recent rally over the last three weeks was sufficient to create a higher low in the coming days.
I am watching for a higher low and then a higher high to develop before I conclude that the initial bear leg is “in” and that a bear market breather may allow a reasonable advance for a few months – before a big and hopefully final assault on the 2007-2009 bear market lows, later this year or next year.
If you are long right now, be careful and be prepared for retracement in the coming days. If you are considering buying the dips, be forewarned that the short-cycle technical tools may not be reliable for determining the depth of a pull back in prices, just like they were unreliable in determining the extent of the recent advance.
Overbought and oversold conditions are likely to be extended, much like we have seen in the latest two huge swings in prices.
Too many investors and institutional players are trying to time the market as a technique for capturing gains to offset recent losses. This may be one of the more treacherous times for an individual investor to try and beat the market.
The market doesn’t know which way the next trend will likely be or how far it will run, let alone the technical analysts charting and monitoring, as they try to get their hands around this beast.
I continue to recommend caution and a defensive posture, feeling we are now in a pull back period.
No comments:
Post a Comment