In the last couple of months I've been making mention of the issues that made me IT cautious about the market...the main reason I went 70% cash. The major concerns I had were that leading indicators such as the ECRI leading index along with global manufacturing guages were downshifting. Meanwhile "market character" started to change such that we started seeing a string of small but persistent declines, something that we didn't see during the run up from September to April. That's consolidation or bear market behavior as opposed to the short but sharp dips you see in up trends. I also made mention that the yield curves of emerging markets Brazil, India and China were inverted or flat warning of at least a significant slowdown. All of these concerns are coming home to roost now as it's becoming more and more evident that a global slowdown is taking place.
A lot of things I was expected to see during this consolidation are finally happening. The 200 day, along with the March lows got taken out During consolidation phases you need to see the weak bulls get cleaned out and the bears get euphoric before a bottom can be reached and with everyone being a technician now a days, I suspected that we would have to see well known support levels and trend lines taken out.... just like last summer.
The main culprit of this correction in my opinion is not so much the bickering in the Washington, or PIIGS but rather, high commodity prices. This is the reason for the tightening that has taken place across the globe which has caused growth to slowdown. So therefore, I believe the tightening bias won't end until they come down to the point were inflation pressures are eased. That to me suggests oil in the 80's....at least.
So, until the headwinds abate, the market will at best be in a trading range and at worst it could be the start of a new bear market. I have my doubts about the latter but because I always have respect for market action despite my convictions since unlike the permabears who got murdered since 2009, I realize the possibility that I could either be wrong or very early...either of which is big money loser. Therefore, I won't make any moves until I see either a "whites of the eyes" type moment were the market is extremely oversold and sentiment is extremely bearish or when the market is acting in way that confirms my LT bullish convictions which I suspect won't happen until the market begins to sense that emerging market countries will be ending their tightening campaigns.
Patience folks. One of the hardest things for people to learn is patience. Most people feel the need to make trades every day or every week. This is counterproductive and it will cause you to be myopic about the market. I said this before one time....in any given year, you will very likely be able to capture all of the major moves in the market by making just 2-5 major trading decisions....that's it! You can just twiddle your thumbs the rest of the time! Professional poker players don't play most hands. The vast majority of the time they fold and just watch. They usually wait to play premium hands. Do the same. And unlike in poker, you can't bluff the market playing weak hands...you will get called every time! So, play only the premium hands. If it takes several weeks or even several months then so be it....and you don't have to be forced to play to defend your blinds either.
The good news for the bulls right now is that sentiment is heading to bearish extremes quite rapidly to the point were another ST low is likely not too far away ( if not already put in today), while making large strides in making the ultimate correction bottom low. The % of SPX stocks trading above the 200 DMA is at 40%. At the bottom of last summer's correction it got as low as 30%. The put/call ratio looks poised to close over 1.3 which is consistent with ST or IT bottoms. The fact that such a high reading is happening on an up day is very encouraging from a contrary point of view. We saw a similar reading in mid June, early July of last year and early September of last year of all which were either great ST or LT buying opportunities. I suspect though that if today was a bottom, it will take at least 2 weeks of backing and filling before any kind of sustained rebound will take place.
Ultimately, I think we need to see oil at least in the mid 80's before we can get out of this morass for good.
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