Last week stocks put in one their worst showing in a year, with blue chips dropping nearly 4 percent. Market breadth was lousy and volume remains on the light side. This week share prices are staging a half-hearted rally, but we suspect stocks will continue to have a downward bias in the near-term.
There’s a growing list of reasons traders can point to for offloading shares. An increasing number of economic statistics are starting to roll over, which is calling into question the viability of the recovery. Excluding the Financials, in many cases fourth-quarter results are coming in shy of expectations in term of both profits and revenues. The prospects for gridlock in Washington now that the Dems no longer have a veto-proof lock in the Senate, greatly reduces the chance for passage of a second stimulus package if needed. Also out of Washington, Obama’s plans to curb bank speculation, along with the possible ouster of Ben Bernanke as Federal Reserve Chairman have investors on edge. And, of course, there are concerns about the health of China’s economy.
We’ve had a modest rebound this week, but the underlying action suggests there’s no conviction behind the buying.
Regardless of the root cause of the correction, share prices are still overbought and trading at fairly high valuations. Since launching off the March lows, equities have avoided a 10 percent plus correction. But all markets require periodic resets to pave the way for further advances.
On the plus side, although our short-term indicators are telling us the correction hasn’t run its course yet, our intermediate-term indicators remain somewhat bullish. So the current selling may be just what stocks need before they can make a run at new recovery highs. But a meaningful advance will depend on visible signs the economy is improving. And while oil prices have backed off their highs with rising perceptions that China’s red-hot economy will slow, the damage from rising energy prices may have already been done to our own economy.
