By: Jack_Steiman
The best thing to do is not be emotional. To write this update from a perspective that has no interference from what seems to be a bear market in the making. It may not be a bear at all, but let's explore what's going on here and what seems to be trying to set up. Let's start with facts. Simple facts. We are seeing unemployment increase. We are seeing unemployment claims rise. We are seeing wages fall because no one has power as a worker to demand more. Employers can fire anyone and find someone in the snap of a finger to replace that worker who wants more. Employees are working out of fear, and thus, accepting whatever comes, even if it means taking on more work for less wages. Just the reality of the world these days. Again, simple truths about what's taking place.
Let's discuss further truths. We know the fed will no longer partake in the QE program. No more easing from him. It's caused inflation without stimulating the economy. The program has been a complete and total failure and now fed Bernanke is admitting to it. Good for him for finally recognizing the error of his decisions. He's hurt the economy, but at least he now sees he has to stop, so that's a good start. More facts. The New York Index report showed we're in a negative growth economy. The Philly fed reported exactly the same down turn. The down turn over the past two months frightening at best. The economy is in free fall. The hope is that we're in a soft patch. That's hope, but not a fact. We're dealing only in facts for the moment. We can deal with fantasy later on in this report.
The manufacturing report fell off a cliff. From 60 to 53 last month. It was expected only to drop to 57. Things are eroding at a very rapid pace. There's more, but these are the facts that are relevant to the real world, and to fantasyland, known as the stock market. None of the news is very good here. In fact, it's just about all bad and why we're close to breaking down into a bear market. But only the facts. WE HAVE NOT BROKEN DOWN INTO A BEAR MARKET. More to come later on in this letter on that.
So we were at 2887 Nasdaq at the top and now we're at 2616. A nice drop of 271 points. 9% isn't terrible when you think about it. Normal bull market correction stuff. Normal would be from 8%-12%. Some are less, of course, but since we had such a bad sentiment problem at the top, and since we also had bad negative divergences on the weekly charts at the top, 9% isn't anything at all really. We have to look at the daily charts and decide whether the market is ready for the big heave lower.
Well, we know that most of the negative divergences have been worked off on the weekly charts. We know the sentiment problem no longer exists. The spread is only 11% percent now after topping out at 41.6% when things were too complacent. The headaches of the past no longer exist. In fact, things are getting a bit too bearish. What is a problem is the economy doesn't mean we're destined to go into a bear market. It could be a slowing down period only, and if the market senses that, the market won't break down.
The market will tell us soon by the way it reacts to suture reports. We'll have the employment report soon and we'll get another report on manufacturing quite soon as well. If those reports show another huge move lower in terms of jobs lost and a slowing of economic activity, the market will have a much tougher time holding up above S&P 500 1249, the line in the sand. It's going to ultimately be decided by the economy and earnings that are about to be reported.
Let's talk now a bit about those earnings to come. What can we expect, or what should we suspect will happen. We know that three months ago when the world reported their last quarterly results, the numbers were good and here's the most important point. There were lots of company's guiding higher for this quarter about to begin. With the rapid diminishing in the economy over the past two months, it's hard to imagine those reports of higher guidance actually being met. You'd have to think that many will say things fell apart in the past two months, and thus, they're going to miss on their earnings report, and more importantly, they'll likely guide lower for the next quarter. You can't think the market will like that very much. A declining economy into negative territory, and a declining earnings environment, is not good for the stock market. We'll get the answers soon enough for sure on that front. The earnings season has a massive red flag attached to it now because of how the economy has faltered recently.
It's very easy to feel negative about everything. The market stinks, and there are many stocks now trading in their own bear markets, including Apple Inc. (AAPL), the leader of leaders. It had a five bottom breakdown of 325 today with high volume making it the real deal. It broke down and recovered yesterday, but didn't come back today at all. A nasty candle stick to end the week. It's hard to envision the market hanging in above bear market territory with Apple in a bear market for the moment at least. However, when looking strictly at the facts, the market is hanging in there above the breakdown levels of 11750 Dow, 1249 S&P 500 and 2600 Nasdaq.
Those are the weekly up trend line figures off the March 2009 lows. That's what basically separates the market from moving out of the bull and into a bear. If those levels get taken out with force it's good-bye time for this market. The Nasdaq, the weakest link, is the leading loser these days as froth is being taken out and shot. The Nasdaq is only half a percent above the breakdown while the S&P 500 is still nearly 2% above. For now, to be blunt and state facts only, the bears have done some good work, but they HAVE NOT taken this market from bull to bear at this moment in time. And that's the bottom line for sure. We're still technically in a bull market until we lose 1249, 2600 and 11,750.
If we study those daily charts for a few moments, you have to say the advantage is on the side of the bulls. Why? Simple. RSI's are near that magical 30 level. Stochastics are near 10 and the MACD's are very compressed low on their scales. Levels that rarely, if ever, get taken out. This definitely gives the bulls hope that we may bottom out soon. Bear markets are notorious for staying oversold and that may be what happens here. Maybe we break below the above listed breakdown levels and those RSI's stay below 30 for some weeks. It can and does happen, but we are at levels on the oscillators where markets normally bottom from. So things are very unclear here.
The action is poor. Leading stocks are breaking into their own bear markets. Economic news is really bad. Things look bad BUT again, we have still NOT broken down into a bear market folks. We have to watch for it, but we're not there yet bears. You're close but not there, and in the end, that's all that matters in the moment. We play according to what is, and not what may happen. Cash is a great position. Some exposure is fine from time to time, but overall, loads of cash is best. Scalp here and there, but lots and lots of cash is best for everyone in this market environment. Take it slow. Relax and let's learn what the market's intent is together over the coming days and weeks.
So we were at 2887 Nasdaq at the top and now we're at 2616. A nice drop of 271 points. 9% isn't terrible when you think about it. Normal bull market correction stuff. Normal would be from 8%-12%. Some are less, of course, but since we had such a bad sentiment problem at the top, and since we also had bad negative divergences on the weekly charts at the top, 9% isn't anything at all really. We have to look at the daily charts and decide whether the market is ready for the big heave lower.
Well, we know that most of the negative divergences have been worked off on the weekly charts. We know the sentiment problem no longer exists. The spread is only 11% percent now after topping out at 41.6% when things were too complacent. The headaches of the past no longer exist. In fact, things are getting a bit too bearish. What is a problem is the economy doesn't mean we're destined to go into a bear market. It could be a slowing down period only, and if the market senses that, the market won't break down.
The market will tell us soon by the way it reacts to suture reports. We'll have the employment report soon and we'll get another report on manufacturing quite soon as well. If those reports show another huge move lower in terms of jobs lost and a slowing of economic activity, the market will have a much tougher time holding up above S&P 500 1249, the line in the sand. It's going to ultimately be decided by the economy and earnings that are about to be reported.
Let's talk now a bit about those earnings to come. What can we expect, or what should we suspect will happen. We know that three months ago when the world reported their last quarterly results, the numbers were good and here's the most important point. There were lots of company's guiding higher for this quarter about to begin. With the rapid diminishing in the economy over the past two months, it's hard to imagine those reports of higher guidance actually being met. You'd have to think that many will say things fell apart in the past two months, and thus, they're going to miss on their earnings report, and more importantly, they'll likely guide lower for the next quarter. You can't think the market will like that very much. A declining economy into negative territory, and a declining earnings environment, is not good for the stock market. We'll get the answers soon enough for sure on that front. The earnings season has a massive red flag attached to it now because of how the economy has faltered recently.
It's very easy to feel negative about everything. The market stinks, and there are many stocks now trading in their own bear markets, including Apple Inc. (AAPL), the leader of leaders. It had a five bottom breakdown of 325 today with high volume making it the real deal. It broke down and recovered yesterday, but didn't come back today at all. A nasty candle stick to end the week. It's hard to envision the market hanging in above bear market territory with Apple in a bear market for the moment at least. However, when looking strictly at the facts, the market is hanging in there above the breakdown levels of 11750 Dow, 1249 S&P 500 and 2600 Nasdaq.
Those are the weekly up trend line figures off the March 2009 lows. That's what basically separates the market from moving out of the bull and into a bear. If those levels get taken out with force it's good-bye time for this market. The Nasdaq, the weakest link, is the leading loser these days as froth is being taken out and shot. The Nasdaq is only half a percent above the breakdown while the S&P 500 is still nearly 2% above. For now, to be blunt and state facts only, the bears have done some good work, but they HAVE NOT taken this market from bull to bear at this moment in time. And that's the bottom line for sure. We're still technically in a bull market until we lose 1249, 2600 and 11,750.
If we study those daily charts for a few moments, you have to say the advantage is on the side of the bulls. Why? Simple. RSI's are near that magical 30 level. Stochastics are near 10 and the MACD's are very compressed low on their scales. Levels that rarely, if ever, get taken out. This definitely gives the bulls hope that we may bottom out soon. Bear markets are notorious for staying oversold and that may be what happens here. Maybe we break below the above listed breakdown levels and those RSI's stay below 30 for some weeks. It can and does happen, but we are at levels on the oscillators where markets normally bottom from. So things are very unclear here.
The action is poor. Leading stocks are breaking into their own bear markets. Economic news is really bad. Things look bad BUT again, we have still NOT broken down into a bear market folks. We have to watch for it, but we're not there yet bears. You're close but not there, and in the end, that's all that matters in the moment. We play according to what is, and not what may happen. Cash is a great position. Some exposure is fine from time to time, but overall, loads of cash is best. Scalp here and there, but lots and lots of cash is best for everyone in this market environment. Take it slow. Relax and let's learn what the market's intent is together over the coming days and weeks.
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