I'm a little late this week, but with the benefit of Monday's session, I think we have some added evidence for the beginning of a multi-month decline. The character of this latest selloff has a different feel than either the July or October selloffs. I would venture to guess that if I asked people a month ago that we'd have an unemployment rate of 9.7% and GDP growth of 5.7% (annualized), the stock market would be squeezing shorts into oblivion and trudging yet higher toward the heavens.
Not so. Apparently, good news only mattes when, well, when it matters. If the stock market goes down, then the good news doesn't matter and something else does. Got it? Right. Perhaps it is best to pay greater attention to the bigger fundamental picture and what the market does, rather than the monthly or weekly data. People decide what stocks are worth based on their emotions. And their emotions appear to be directed by something other than the monthly data. The best explanation I have found for this phenomenon is that people merely take their emotive cues from each other - oscillating between optimism and pessimism.
Right now, everyone feels panicky about the situation in Greece, Portugal and Spain. But these problems are not new. They've been problems for a good 5 years now. The difference is that people are now paying attention to them. But I am sensing a great deal of complacency about the nature of this decline. Most sound completely certain that it is only a minor correction. And this gives me greater reason to believe that a far larger decline is upon us. See the chart below where a survey of 140 newsletter writers shows quite a decline in bullish sentiment, yet a far smaller increase in bearish sentiment. Notice how the two typically inversely correlate perfectly. But this time, we see a very strong resistance to the idea of becoming outright bearish.
(Data as of last Tues)
Elliott Wave patterns have been extremely compelling on the way down. This is in contrast with the October selloff, where one had to stretch to count 5 waves down and when it rallied, it rallied very compellingly. The bounces on this selloff have been weak and overlapping. The implication is that a 3rd of a 3rd wave down is just beginning. Support resides in the 940-980 range. This count from Daneric's Elliott Wave Blog looks like the most probable from my perspective.
The Euro/Yen cross has been a reliable indicator for risk aversion over the past few years. While I feel that trend will break at some point, it still bears watching.
Gold needs to hold the 200 day EMA to avoid significant technical damage. I think a test of the April lows at $865 is a best case scenario.
The weekly chart of oil is not looking pretty. I've pointed out the bunched up moving averages before, and they usually portend a major move in one direction or another. I still think we see new lows for oil as speculators unwind their positions. A sustained break of $70 would be very bearish.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.