On Weedwacking and Crabgrass

June 16, 2009 7:30 am

There are several technical indicators that have flashing some very concerning signs. One in particular is the number/percent of stocks in the S&P 500 and NASDAQ 100 that are above their mid- and longer-term moving averages.

Clearly this rally has gone a long way to prove that there is more than just a run of the mill short covering rally underlying the move; but traders still pay close attention when overbought signals appear.

The question now to ask is how long will the correction last (if it is more than a one day wonder) and is there something lurking that could completely derail the uptrend. Consider the following:

  1. Global markets are falling in unison. This could create another cascade as we saw earlier in the year
  2. Economic news is coming in much weaker than was expected
  3. Bonds and currency fluctuations are showing extreme volatility, showing that investors are not willing to be patient
  4. Political tensions are rising – North Korea, Middle East, BRIC Nations
  5. Investors want evidence of a recovery – hope is no longer good enough to raise markets
  6. U.S. government intervention and reckless spending is spooking global trading partners
  7. 9.4% U.S. unemployment – enough said on that
  8. Talk of exit strategies is causing stimulus addicted nations to fear the “other side”
  9. Low volume for NYSE/NASDAQ over past weeks show that investors are no waiting for the next move.
  10. Uncertainty regarding Obama Health care initiatives
  11. Inflation fears rising due to massive commodity retracement
  12. S&P approaching 20-day moving average – SMA  923.19 , EMA 924. 49 (closed Monday at 923.72)
  13. NASDAQ approaching 20-day moving averages –  SMA 1793.68  EMA 1802.29  (closed Monday at 1816.38)
  14. S&P/NASDAQ Declining 200-day moving averages
  15. A series of low volume rallies with high volume sell-offs
  16. Mortgage rate increasing to 5+ month high
  17. Foreclosures, delinquencies and bankruptcies rising
  18. Extreme flow of secondary issuance which will cause earnings dilution next quarter
  19. Highest volatility stocks leading way throughout rally
  20. Most technical indicators (Stochastics, McClellan Oscillator, MACD etc) showing overbought condition for major indicies

Now is the time to take a short pause, look at what is occurring before making any substantial commitments. Broad based hedging with inverse ETFs to manage individual long positions may be a an idea worth pursuing as well.

While there are signs that a recovery may take hold at the end of 2009, there are others that appear to be providing evidence that 2010 is the earliest that the economy will stabilize.

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