Quite a bit of uncertainty still even with the amazingly one-sided action for the month of June. With seven days down of the first eight trading days, this start is the worst markets have seen since Oct 2008. It was just after that drubbing markets went into a tailspin and did not finish dropping until the bottom in March 2009. Of course, there were many different issues back then including the Madoff discovery. Today, markets are seemingly on better footing but is starting to reflect the challenges of the global economy. While a 10% correction off the top would be no surprise (and considered healthy by many investors) anything more than that would put this 2+ year bull market trend in jeopardy. Higher gas and food prices are an albatross around the neck of consumers. Housing is a mess. Wages are stagnant and the jobs market momentum may be stalling. Further, unrest in MENA still exists and problems in Europe continue to erode confidence. Is this just a violent correction or something more?
Banks Give a Good Indication
I always look to the banks as an indicator of market health. If one would take the temperature of this group we’d find it had a high fever and chills. The leaders have been nothing of the kind. Across the board bank stocks have been distributed at every opportunity. You can see from the chart below the financials are clearly in a downward spiral, breaking support at every level. I suppose the banks will bottom at some point but with so much uncertainty surrounding the group it’s far more premature to jump in and call a bottom (chart below with notes).
Battle at the Fed
It seems every meeting of the Fed is categorized as the ‘most important meeting ever’. I suspect the one coming up later in the month may be highly contentious – but the most important? Doubtful. Frankly there is derision at the table but clearly the Fed is not out of ammunition. We must remember the stock market game is played at a higher level and Chairman Bernanke holds all the pieces – and owns the game board. While this month has been decidedly bearish in terms of price action, let’s not forget about the Fed – it was stated last week that continued accommodation was needed – that leaves the door open to more liquidity and perhaps another round of QE.
Selling What you Have to, Not what you Want to
When we see price levels violated on a technical level we tend to ride that momentum trend lower and look for steep drops in quick timeframes. Long equity holders face the decision of bailing out quickly or feeling a great deal of pain. There is nothing wrong with going to the sidelines and waiting out the volatility, which may certainly be on the rise (see chart below). We are probably near a culmination of selling or climax that may usher in a new set of buyers – but wait for it.
