The U.S. stock market is really at a critical juncture right now.
I'm all for being optimistic at the prospect of a super-oversold condition amid rampant pessimism. But bulls need to take charge of the controls of this sputtering plane. But now that they failed to yank the stick higher before the February lows, the bottom is really in danger of falling out.
Most corrosive for the major indexes' value at present are large-cap energy and bank stocks, which have fallen 7% as a group amid a hex from the BP PLC (NYSE ADR: BP) blowout and financial regulation clampdown.
You would think that a cut in oil supply from the Gulf of Mexico would provide a strong undertow for energy, at least, but investors have been acting like industrial demand will grind to a halt in coming months.
June historically has been the second worst month of the year, after September. But after suffering through the worst May since 1940, and bearish sentiment on overdrive, it's fair to expect opportunistic investors to dive in now and take advantage of bargains.
Jason Goepfert at Sundial Capital, an expert on sentiment, observed that 40% of his sentiment indicators - including volatility, options trading, breadth, investor surveys, professional positioning, short-selling and cash levels - have reached bearish extremes, which should be bullish for the market. That's the most since March 2009, which means it's enough for a tradable bottom but nowhere near the 50% to 70% he has seen at prior panic lows.
And Tom McClellan, an expert on market breadth measures and cycles, has been giddy with excitement in the past few days at what he considers to be a super-juicy oversold condition. On Monday night he listed eight gauges, some of which go back to the 1920s, that suggest that market is at an oversold extreme amid a steep but not abnormal correction of a primary uptrend. He's not looking for new highs until after the November elections, but sees a strong potential for a slow but steady new uptrend to develop within days.
Yet investors just don't seem to care, as they are back in "shoot first, ask questions later" mode. Why so much selling amid fairly positive economic stats? I picked up one clue from a financial advisor at a major brokerage in San Diego, CA. He said that a lot of his clients are simply losing confidence in all government, corporate and regulatory agency leaders, and have begun to lose faith in the market as an appropriate place for their savings. Bottom line, he said, is that "they don't want to go through 2008 again."
Fair enough.
But bulls need to find a way to turn this thinking around, because it has begun to feed on itself in a negatively reinforcing way. Justin Mamis, a Canadian analyst, points out that the slope of the 200-day average of the Standard & Poor's 500 Index has flattened out and is not far from flipping over. While this may seem like one of those silly chart comments, it is actually important.
What it means is that the accumulation of 40 weeks of thought about equities is on the verge of turning negative. This was a key downturn signal at the start of 2008. And of course, as you know, the European and Chinese markets' 200-day averages have already crossed the line into the red.
News and Related Story Links:
- Money Morning:
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Two Big Reasons to Believe the U.S. Stock Market Will Bounce Back - Money Morning:
Caution Is the Buzzword After Last Week's Stock Market Drop - Money Morning:
Should Investors Sell in May and Go Away, or Ride the Bull Awhile Longer?