Courtesy of John Nyaradi
The “death cross” confirmed at the end of last week’s dramatic action, and this significant event points to the growing possibility of a new bear market.
Looking at the chart of the S&P 500 over the last 13 years, we can see that the “death cross,” where the 50 Day Moving Average crosses below the 200 Day Moving Average, has only occurred eight times, (red boxes) including last week’s most recent formation.
It’s easy to see how this indicator can generate some whipsaws but also successfully captured all major up and down moves through both up and down markets since 1999.
Whether or not the most recent formation proves to be the start of a new bear market or a whipsaw in an ongoing bull market remains to be seen, but this is a statistically valid indicator that certainly deserves careful consideration by serious investors seeking to capture major market moves.
In fact, this is such a serious indicator that Dow Jones Indexes has created “The Dow Jones Golden Crossover U.S. Large-Cap Total Stock Market Index SM.”
On My Wall Street Radar:
In addition to the “death cross,” the point and figure methodology, used by Charles Dow himself, points to a significant break of the positive trend line that has been in play for more than two years.
Chart courtesy of www.stockcharts.com
In the Point and Figure chart above you can see how the column of “Os” broke the blue, bullish support line. Like the “death cross,” this is a rare and significant event and supports the probability of lower prices ahead.
And, finally, the major indexes are also all below their widely watched 200 Day Moving Averages which is another confirmation of bearish conditions in play.
The Economic View from 35,000 Feet:
The economic news continued to be dismal last week as the major markets endured extreme volatility and with four straight days of 400 point swings on the Dow Jones, global investors were taken on the wildest and rarest of rides. “Rare Streaks of Four Days or More of 4% or More.”
In Europe, the crisis continues, this week focused on France and their GDP which generated a huge miss, coming in flat and raising expectations of the possibility of a downgrade of the country’s “AAA” rating. Eurozone industrial production fell into contraction, declining -0.7% in June, while Germany, the economic engine of Europe, posted a decline in industrial production of -1.1% for June, indicating slowing conditions in the EU and the rising possibility of a regional recession.
At home, the darkest news was in the August consumer sentiment index which declined to 54.9 from 63.7, marking the lowest level in this indicator since May, 1980. This is a remarkable number, considering that we are supposed to be in “recovery,” and looking forward the skies grow darker yet with the expectations index declining further to 45.7 from a previous reading of 56.
The Federal Reserve also confirmed historically weak conditions by affirming that their low interest rate environment would continue into 2013. This is an unprecedented step for them to take, and now most analysts have fallen into two opposing camps, those who say that the Fed is out of bullets and those who say that quantitative easing, (QE3) is now inevitable.
All of these factors point to the increasingly likely possibility of a double dip recession in our futures. “Slouching Toward a Double Dip For No Good Reason.”
What It All Means for Stock Market and ETF Investors:
What it all means is pretty simple; more volatility, more danger and more opportunity for those who can be on the right side of these dynamic markets. Markets remain oversold and so a dead cat bounce or bear market rally is a real possibility; however, the major trend remains negative and defensive positioning would seem appropriate.
The Business and Financial News Week Ahead:
This week we’ll get reports from the manufacturing and homebuilding sectors.
Monday: August Empire State Index, August Homebuilders
Tuesday: July Single Family Building Permits, July Housing Starts, July Industrial Production
Wednesday: July Producer Price Index, July Consumer Price Index
Thursday: Initial Unemployment Claims, Continuing Claims
ETF Spotlight
Leaders: (IAU) Gold (TLH) Bonds
Laggards: (IAT) Regional Banks (ITB) Home Construction
This weekend my family and I were in Annapolis, Maryland, for Parent’s Day at the U.S. Naval Academy where we had a great reunion with my second son who completes Plebe Summer next week. It was a great to see him in his Navy whites and we’re already looking forward to our next visit.
Wishing you a great weekend wherever you may be,
John
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