Here's a chart of the SPY in 5 minute increments going back 7 days. Notice the market tried to make new highs several times and couldn't cross the thresh hold. Also note the SPYs went through the previous support level and went down quickly from there.
Here's a 5 minute chart going back two days to see today's action in more detail. Notice the average dropped for most of the day. There were simply no buyers in the market until right before 2 PM
Here's the SPYs daily chart. Note there were two previous selling periods in the last 3 months. The first occurred in late May/early June and the second occurred in mid-June. This indicates there has been an underlying skittishness to the markets for awhile.
Note we are still in bull market territory because we are over the 200 SMA. Also note he have about 2% more to go before we hit the 200 day SMA. If the average hits 145, then the correction will be about 6.5%. This would be a standard market correction.
Finally, note the incredibly high action on today's selling. Lots of people were heading for the doors. In the long run, this is a good thing because it clears out the dead wood in the market. Short term, however, it's obviously very painful.
Here are two culprits. The first is the financial sector, which is basically in free fall right now. Investors are concerned about the debt markets. The CDO/CLO markets have gotten hammered lately. However, there is also concern about the health of the LBO market. The Chrysler deal may not go through. Overall financing for the recently announced LBOs is coming into question. Countrywide Financial's latest earnings announcement certainly didn't help. And the ongoing weakness in the housing sector is increasing the concerns related to foreclosures.
Note the average is below the 200 day SMA and the latest volume has been incredibly heavy.
Finally, here is the IWNs -- a proxy for the Russell 2000. Investors are clearly getting out of the small cap game right now.
So -- what does this mean?
1.) The market is clearly correcting. That's a no brainer.
2.) The market sold-off about 5.5% in late February/early March after the China market sell-off. We're 1% below that level right now, so there may be some more downside room.
3.) There are a lot of questions about the health of the financial industry right now. Until those questions are resolved, the markets will be nervous.
4.) There have been some earnings concerns. Exxon's slight drop did not help. However, there have also been some good numbers as well.
5.) Tomorrow's GDP report is now doubly important to the bulls.
6 comments:
This foreclosure graph for California is very frightening. Although the rest of the country might not have it quite as bad as us, it seems like there is alot more bad news yet to come from the financial sector. I noticed that foreign markets have taken a parallel dive along with our markets - although we hear everything is global these days, isn't the current mortgage fiasco a uniquely American phenomenon at the moment?
The mortgage debacle may be a preview of coming attractions for Britain and Spain
Clears out the dead wood?
Thats a new one...
When you consider that the S&P moved away from being a tech-heavy index after the last bust to a financial-heavy index over the past 5 years, it's no wonder that a credit crunch will scare the pants off the index fund managers out there.
Let's say the next 6 months sees a 10% correction in the rest of the indexes, but a 15% drop in the financial-heavy S&P. That moves the S&P to a 10% loss for the year and more to come in the 2009 housing-led recession as the financial stocks continue to get whipped with much lower profits.
Can financial stocks give back 20-25% of their gains over the next 12-month period? You bet.
Don't we already know about the subprimes, though? People were talking about it when the DOW was 14,000.
Why the sudden market panic?
Nah, I think we're just seeing some pre-August selling. Two worst months of the year coming up investing wise. Traders getting in that last trip to the Hamptons. Etc.
The media is paid to come up with a story and explain it all. Subprimes are just the convenient, easy to reach, low hanging fruit, story. If it weren't there, it'd be Iran or Iraq or North Korea or ....
We've been due for a pullback for awhile. Markets don't go straight up.
Enjoy the coming recession!
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