Friday, February 22, 2013

Morning Market Analysis; Is A Bigger Sell-off In the Cards?

Today, I wanted to take a somewhat different angle on the morning analysis by tying together a few threads. 

1.) As NDD has pointed out a few times, we're closer to the next recession largely as a function of time.  The expansion started in June 2009 and has been incredibly weak.  It won't take much to tip us into recession right now -- although I don't think we're currently in a recession.

2.) With the exception of China, the rest of the world is limping along.  The latest readings from the EU were terrible.  And we're starting to see the effect of the payroll tax increase and will see the sequester hit next week.  In short, the macro environment is just not that exciting.

3.) The latest Fed minutes show the Fed is concerned with the effects of QE.  As the Money Supply blog noted, most of the discussion at the January meeting was from non-voting members.  But the tone of the minutes indicates there are some serious questions being asked about the programs efficacy and costs.

4.) The general consensus is that we'll see a mild sell-off.  And that should worry us:

Everyday I speak with investors from all walks of life: hedge fund managers, stock brokers, retail investors, high net-worths, buddies both in and out of the industry, etc. There seems to be this ongoing consensus that the inevitable stock market pullback is going to be just that, a pullback. In fact, everyone is sure of it.
From an investment psychology perspective, this worries me. Remember, when everyone is so sure of something, it typically pays to at least consider the alternative. What if this is not just a pullback?


So do we short everything and not cover until S&Ps are down 40%? No. But I do think it’s worth pointing out that the consensus seems to be that this will be a shallow pullback. We’re at least considering the possibility that it isn’t. There’s no harm in that. The foul would be not to.

5.) The latest rally is pretty close to over.  The SPYs have broken trend,

As have the IWMs.

 The DIAs are now moving sideways

 The QQQs never really got started,

 So -- let's tie this into the bigger cycle:

The charts above are from ETF Corner.  They are hypothetical.  However, given the underlying fundamentals, they are hardly out-of-the-norm.