It's Time For Some Relief!
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BEING STREET SMART
by Sy Harding
It's Time For Some
Relief! August 12, 2011.
We’ve had enough bad news in recent months. It’s time for at least some
temporary relief.
The economic news has been awful. The ‘soft-spot’ in the first half that was
supposed to be temporary turned out to be worse than previously thought. GDP
growth, previously reported as having been around 2% in the first half, was
recently revised to being up only 0.8%.
The return of strong growth that was supposed to begin in July did not show up.
Consumer and business confidence, which was expected to produce the improvement,
instead deteriorated further in July, accompanied by unexpected further declines
in both the manufacturing and services sectors.
The increasingly bad news has economists now saying that rather than the
first-half ‘soft spot’ being temporary, the odds are 50-50 that the economy is
sliding into another recession.
Globally the reports are similar, news of slowing economies, and serious
government debt problems. The success of the additional bailout plan for Greece
a couple of weeks ago is already being questioned, and Europe’s debt crisis is
apparently now spreading to Italy and Spain, countries considered too big to
bail out.
For investors, stock markets around the world have seen their bottoms drop out
in serious corrections, some exceeding declines of 20%, which is the level that
marks entry into a bear market.
Investors in the U.S. have seen $2.8 trillion disappear from the value of their
stock market holdings in just over three months.
In my last column I said it was too soon to buy, that more declines were in
store. And so they were. The Dow lost another 1,400 points, or 11%, in the first
10 days of August.
Enough is enough!
And there is at least some good news for the short term.
Technically, the market is short-term oversold again. That was a condition that
created a brief but significant rally in early July.
It’s a condition that should produce another short-term rally, and have
investors breathing a sigh of relief.
Unfortunately, like the rally in July, it’s likely to be another opportunity for
investors to take some risk off the table by selling into the strength, rather
than being the end of the correction.
I base that on a number of conditions.
Based on technical analysis and charting, the major market indexes like the Dow
and Nasdaq are short-term oversold beneath their 50-day moving averages to a
degree that almost always brings a rally back up to the moving average. That
would be a rally to roughly 12,000 on the Dow.
But intermediate-term the technical picture remains negative. Important support
levels were broken by the sharp decline since the April top, and the longer-term
trend seems to be down.
And investor sentiment has not reached the level of fear and pessimism usually
seen at market bottoms. For instance, the latest poll of its members by the
American Association of Individual Investors this week shows 33.4% still bullish
and only 44.8% bearish. In market corrections, the AAII poll almost always
reaches a level of at least 55% to 65% bearish, and bullishness drops below 20%,
before the correction ends.
Then there is the market’s seasonality. Historically, August, September, and
October tend to be the most negative three-month period of the year.
And in the background, with consumer and business confidence declining to new
lows in July, it’s unlikely the economy is about to reverse to the upside
anytime soon, which is what the stock market needs to see to support a sustained
rally and return of the bull market.
Meanwhile, the nerve-wracking up and down volatility is likely to continue.
Next week will bring a number of potential market-moving economic reports from
the housing industry, and on inflation, two areas on which there have not been
reports in the last several weeks.
So summing up, the short-term oversold condition makes a short-term rally
likely, but with the correction likely to resume to lower lows when it ends.
I’m confident enough of a short-term rally that I and my subscribers took our
significant profits on Thursday from the ‘inverse’ exchange-traded-funds I was
recommending at my sell signal on May 8. But I think it’s likely our indicators
will turn negative again and we’ll be re-taking the ‘downside’ positions when
the expected rally ends.
But meanwhile there should be some relief, at least temporarily, from the
relentless selling that seemed to have the stock market in freefall.
Sy Harding is
president of Asset Management Research Corp, and editor of
www.StreetSmartReport.com,
and the
free market blog,
www.streetsmartpost.com.
These reports reflect
our opinions and are based on our best judgment, but no warranty is given or
implied as to their accuracy. Past performance does not guarantee future
performance.
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