Green shoots withering? too early to tell yet....bears have the edge for time being

Friday's payroll data turned out to be a disapointment with greater than expected losses. This was the obvious reason markets tanked. Prior to this release the number of jobs lost was decreasing each month as you can see in the graph on the right.



One counter trend data point doesn't confirm a change the trend has occured. Think about the whether for example. When it transitions from winter to spring the days get warmer and warmer on average but you still get the occasional cold spell and sometimes even a signficant snowfall. Notice how this is the 3rd time now since the peak of the market in mid June that we have seen a heavy gap down and flat line day.
In fact, practically all of the downside since the peak was accomplished by 2 of these sharp gap down and flatline days alone. This is not how bear markets typcially act. Bear market declines tend to consist of relentless down days interupted by brief, sharp rallies. It's possible that the market will start acting this way going forward but untill we see that, it would be premature to think the bear has returned. However, as I had pointed out before, an IT top is likely put in and so the bears have control for now. I'll say this again....if we get a 10% pullback you better watch out because a lot of people are hoping for this to happen and if the market gives the herd what they want it almost always results in the herd regreting that they got what they wanted.

I warned about the risks of emerging markets before. Here's what I was talking about.

July 3 (Bloomberg)

Inflows into developing-nation equity funds last quarter topped the previous record of $22.4 billion set in the fourth quarter of 2007, the research firm said. The MSCI Emerging Markets Index reached a peak on Oct. 29, 2007, and subsequently dropped as much as 66 percent.

I also read an article which talked about how extremely correlated sectors and even asset classes overall have become and how it has reached a 5 decade high. This is not a healthy sign. It also diminishes the benefits of divesification. It appears as if a herd mentality is dominating the market. Perhaps it is due to the proliferation of all these ETFs out there which I believe is turning the market into a giant casino wherby everyone is now a short term trader. I've also noticed that turning points in the market tend to come in the way of V bottoms and tops with many gap and run type days. This has been frustrating for me at times because it forces you to have to pick tops and bottoms as opposed to getting a confirmation via a retest of some sorts which prior to the last 12 months would often occur. I believe this action is a symptom of the casino like nature of the market. As a result, I belive now more than ever, investor psyocology is a dominating factor. If you think that your stock picking abilities make you money in the past 3-4 months think again. Practically every stock had massive rebounds. Did they all deserve to? Probably not, but then again not all of them deserved to get crushed like they did last year and early this year. Perhaps the market will sort out the winners from the losers in the months ahead and begin to normalize.

Ok, on to the short term prospects of the market. Everyone including my grandmother is talking about the head and shoulders pattern seen on the S&P.





Therefore, there's a good chance we see a false breakdown from this pattern. I think there is going to be a weak bounce on Monday followed by more downside later in the week. If the bear is in fact back, it's not going to make it easy for people to profit from it mark my words. Traders will either get whipsawed to death or take profits way too soon....whatever happens, I just hope the markets get exciting and don't go back to summer doldrum mode.