Just as we thought we would see in 2010, a significant correction is now under way. Our thoughts were for a 10-15% correction. Up until the last eight last trading days we have seen an unprecedented move in the Dow Jones Industrial Average from 6469.95 on March 6, 2009 up to a high of 10729.89 on January 19th 2010 - in all a 65.84% gain without a significant correction along the way.
After 2 weeks of range-bound action in the S&P 500 between 1130 and 1150, the stock market has fallen victim to uncertainty over the last 8 trading sessions.
We have seen 662 points or 6.1% peeled off the Dow Jones Industrial average in a near a straight drop. Those who feel this is a small minor setback before we go onward and upward should really ponder the following and look at some of the factors we have outlined below.
The real problem for the stock market is UNCERTAINTY. When uncertainty re-enters the market we should not be surprised at what we have seen of late.
Let’s take a look at what I perceive to be the 5 main factors contributing to the decline:
- Earnings: Even companies such as Intel, IBM, Goldman Sachs (GS) and Apple (AAPL) have reported better than expected earnings and revenues, yet the stocks are selling off. This simply tells us the stocks have already factored in great earnings at their prevailing prices, so it has become a "sell the good news" mentality now.
- China: China is concerned about a bubble developing in their country and is now talking about taking their foot off the accelerator. Talk about raising rates in March (sooner than expected) and tightening lending standards is continuing to concern the markets. How will this really effect the global economies?
- President Obama's administration: The current administration in Washington is now clamping down on Wall St. and the whole financial industry. Will they or won’t they tax the banks and how much? What other policies will actually go through and what effects will they really have? It certainly appears the public ("Main St." as they like to call it) is getting fed up with the Obama policies, hence he tried to win the public over with his State of the Union Address. I am not so sure he won anybody over and certainly not Wall St.
- Sovereign debt crises? World Dubai back in November of 2009 had a serious debt crisis, now we are starting to hear more about Greece and other sovereign countries. How many more shoes are there to really drop and what ripple effects will they have?
- US Economy: Will we truly see a real economic recovery with job growth?How well will the economy do once all of the government programs have expired? I think Wall St. is now questioning both.
You can only take a market so high based on earnings and economic growth prospects. Then, irrespective of earnings and economic growth (even if both are stellar), the stock market will self correct. Back in 2001 the United States experienced a fairly shallow recession - it was declared to be over in November of 2001. From November of 2001 until March of 2002 the stock market rallied (4 months) and than declined for the following 7 months before bottoming out. The highs that were seen in March 2002 were not seen again until January 2004 - nearly 2 years later. One has to remember, that was a fairly shallow recession, what we just experienced in 2008-2009, was the real deal, nearing a depression all over the world.
The severity of this recession and the systemic issues it has caused will have ripple effects for years to come, thus our feeling is the stock market will be range bound for the foreseeable future. How could one expect less than that, considering we have rallied sharply off the March 2009 lows. If we analogize the 2001 depression and how long it took for the stock market to really move back up in earnest I think we should be very content with the rally we have seen.
Our Short Term Market Thoughts:
After some sort of washout in the coming day(s) and a rally back up to resistance (we hope) - we feel there is still unfinished business on the downside. It would not surprise us to see the S&P 500 and Dow Jones Industrial Average find their way back to their respective 200 day simple moving averages at some point in 2010.
The 50 day moving average support level (1114) was broken last week and now this past week we have taken out and closed below some key support at 1080. Other near term support comes in at 1069/1071, 1064/1066, 1058/1059, followed by 1050/1052. One should note, a move down to 1040 on the S&P would represent a 10% correction. Over the next 1-2 days we would anticipate some sort of wash out to the downside followed by a snapback. Our goal for a snapback would be to 1115-1120 but that may be too optimistic. At 1115-1120 one should consider going short with a stop at 1151 above the January 19,2010 highs.
Regardless of how you play the market, at ProfessionalStockTraderLive we always preach for you to use patience, discipline and stops.
Since late November 2009, we have been teaching our members in our nightly video update to be vigilant for this impending change in market sentiment. The 50 day moving average support level (1114) has been broken. Since the 1080 level has been taken out on a closing basis we now need to focus in on the 1069/1071, 1064/1066, 1058/1059, followed by 1050/1052. Over the next 1-2 days we will be teaching our members how to anticipate some sort of wash out to the downside followed by a bounce back to the 1115-1120. At that point we will be teaching our members how to consider going short with a stop at 1151 on the SPX. The real time trading setting allows many to learn how to day trade at this interesting juncture in the markets. Currently, many of our members are coming into our real time trading environment and asking us to show them how to still day trade and profit, if indeed we are in a transition from a bull to bear market. Regardless of how you play the market, we always preach for our members to use patience, discipline and stops."
