Stocks End Q2 Giving Another Sell Signal

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


After Tuesday's sharp drop, it would be reasonable to have assumed that U.S stocks could have at least had a dead cat bounce. Not only didn't the cat bounce, but prices fell even further confirming a head and shoulders top on the S&P 500. Even worse, a more important sell signal will be given by Friday when the S&P's simple 50-day moving average falls below its 200-day. This is a classic bear market confirmation. The first of the month indicator already confirmed a bear market in early June.

While it looks like there's much worse to come for stocks, the second quarter was bad enough as is. The U.S. stock market was in a correction no matter how you measure it. For the quarter, the Dow was down 10% and the S&P 500 and Nasdaq were both down 12%.  From their highs on April 26th to their lows on June 30th, the Dow, the S&P 500, the Nasdaq and the small cap Russell 2000 were down 13.9%, 15.7%, 17.0% and 18.4% respectively. A market is in correction when it has dropped between 10% and 20% from its high.

A market has entered bear territory once it is down 20%. There is more than enough reason to think that this will be happening soon. Both the S&P 500 and Nasdaq hit their 2010 lows on June 30th. The Dow was only slightly above its low on June 8th. The S&P 500's head and shoulders topping formation indicates a possible additional drop of 20% (based on the work of market technician Thomas Bulkowski). This pattern was confirmed when the S&P 500 fell below 1040.78. Its low on the last day of the quarter was 1028.33. In an article on May 28th, I pointed out that this chart pattern was in formation. Well, now it has been confirmed and is providing one more piece of evidence of a market prone to selling.

U.S. stocks already started a bear trading pattern when the major indices sold off during the first four trading days of the month in both May and June. An article I wrote on June 6th detailed the specifics. The next confirmation will be the simple 50-day moving average crossing below the simple 200-day moving average. This will take place for the S&P 500 this Friday, if not today. The ultimate and final confirmation will be given when the 200-day moving averages for the major indices start heading down.  They have been flattening out and trending sideways lately, so this too will be happening soon.

The technical picture for the major U.S. stock indices is not only negative, but is getting worse. The market is dropping just ahead of the sharp and sudden deterioration of the economy that is beginning to show up in a number of places. The upcoming bear market though is likely to move faster than the previous one that lasted 18 months from peak to trough. Traders will love the volatility. Investors should wait for the signs of a bottom, which will offer them many opportunities for major profits.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

First of the Month Indicator Gives Bear Market Signal

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


It was a horrendous day in the markets on Friday June 4th. Trouble began when the euro broke support and selling then spread from Europe to North America. A disappointing U.S. jobs report added to the downward pressure and stocks sank. The small cap Russell 2000 had a mini-crash. The first four trading days of the month were down for the second month in a row, indicating we have established a bear market trading pattern.

Problems began in Europe with rumors of a possible default of a major French bank. Another European country, Hungary, indicated its finances were in trouble. The euro (FXE) fell below the key 1.20 level and traded as low as 1.1919 taken out the 1.1920 low in March 2006. Adding to the woes in Europe was the May employment report that came in well below expectations. Almost all the jobs added were from Census hiring and those jobs will disappear almost as quickly as they appeared. U.S. markets gapped down on the open.

Selling in U.S. stocks was almost continuous throughout the day. By the close, the Dow was down 323 points or 3.2%. The S&P 500 dropped 38 points or 3.4%. Nasdaq was worse still, losing 84 points of 3.6%. The Russell 2000 though gave up 33 points or 5.0%. The rule of thumb is a 5.0% drop in one day is a mini-crash. The Dow closed at 9932, which is the second recent close below the key 10,000 level. This one took place on Friday, so it appears as a loss of technical strength on the weakly charts, a more serious problem than if it had occurred just on the daily charts as was previously the case.

Even worse was that all four major indices were down for the first four trading days of the month. This is a typical bear market pattern. It does occasionally happen in bull market rallies though, so to be significant there needs to be two months in a row with a loss in the first four trading days. May also saw just such a loss, so the two down months in a row have now taken place. A bear market doesn't mean the market isn't going to go up again. Bear markets are known for their sharp and sudden short covering rallies. Traditionally, it means that traders should switch to shorting the rallies instead of buying the dips. Adept short-term traders can of course play the market both ways.

Classic market watchers will not consider stocks to be in a bear market until they've lost 20% of their value. Investors of course should never accept that type of loss. By the time that confirmation takes place; a lot of money is already gone from your brokerage account. So far, the Dow is down 11.5%, the S&P 500 12.5%, the Nasdaq 12.3% and the Russell 2000 15.0% from their respective peaks. Market observers agree that this is a correction because all the indices are down more than 10%.  Informing investors of how much they've lost after the fact is not particularly helpful. The idea is to avoid these events before they take place. If you check, you will see I published a number of articles warning of the sell off before it started.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Stocks Continue Volatile Trading

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


While day traders love it, volatility is never a good sign for investors. Money is made by following the trends and when wild swings up and down occur, there usually is no trend. Even if one is beginning, it's hard to discern.

Right now, stocks are attempting a relief rally to resolve an oversold condition. The market is still in a very vulnerable state. Any piece of news can whipsaw it up or down. Wednesday morning, the 'good' U.S. Durable Goods report helped send the Dow Jones Industrial Average up 135 points in morning trade. The headlines on trading terminals around the globe flashed that durable goods had risen 2.9% in April (excluding the volatile transportation sector, they were actually down 1.0%, but you had to read further to find that not so good news). Morning mania faded late in the afternoon however.

Before the U.S. markets closed, the Financial Times reported that China was reviewing its eurozone debt holdings. The Dow closed down at 9974. For the first time in months it ended below the key 10,000 number. When it went above 10,000 in October 2009, this represented a major breakout on the upside. It looked like the breakout was failing immediately afterwards and then again briefly in February when the Dow spent some time below 10,000 again. In neither case was the index below its 200-day moving average as it is now. We have already taken out the February intraday low of 9822 twice this month. The next step is an intraday number below 9647, the low in November 2009. A break of that level should be considered a sign of extreme market weakness.

Stocks are rallying smartly today however, with the Dow up more than 200 points in morning trade. China denied the Financial Times report and this made the markets jubilant. This is of course nonsensical since there is no way China would admit that it was selling its European debt. Doing so would cause prices to fall and it would lose a lot of money if it acknowledged this. Furthermore, China has a long history of operating in secrecy and admitting what it has done only years after the fact. But somehow traders think the wily Chinese are going to shoot themselves in the foot this time and admit to what they are doing in the markets.

The buoyant mood this morning caused the Nasdaq to gap up approximately 48 points. These large differences from the previous day's close have been common lately. They are also unhealthy. Gaps are usually closed within a few days. Professional traders tend to fade them (trade in the opposite direction). Professional traders also tend to trade heavily around the close as well. This helps explain the typical bear market pattern of strong opens and weak closes. That was certainly the pattern yesterday.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.