It should now be obvious to you why I have been more cautious over the past few weeks. During that time, I outlined for you why I thought the market was in trouble. The simple fact is that every characteristic that usually show up near tops in the market…showed up. I outlined every single one for you. When these characteristics show up, it is time to keep an eye out for trouble. All that has to happen is for negative price and volume to confirm. Subtle signs showed up weeks in advance. Please do not listen to those who say this recent drop came out of nowhere. So, since repetition is key in becoming successful at anything, here are those bearish characteristics that I told you about that would eventually come back to haunt the market.
FINANCIALS
I have been telling you that the big financials were acting like it was 07 all over again. They sit when the market goes up and they lead down when the market goes down. Quite amazing this is occurring while the fed is just handing money over to them. This is important. Financials have always been a key to the market.
MAJOR NEW HIGHS DIVERGENCE
Every time the market went to new highs, there were fewer and fewer stocks hitting new highs…indicating strength was narrowing.
DEFENSE LEADs
Speaking of leadership narrowing, over the past several weeks, we saw DRUGS,FOOD,BEVERAGES,
TOBACCO and UTILITIES lead. It is a classic sign of trouble when the most defensive of issues are being bought
LOW LEVELS OF CASH
Mutual funds are only holding 4% in cash…a very low level…providing very little ammo for the market.
OVER-THE-TOP BULLISH SENTIMENT
I noticed one pundit call for 2600 S&P by 2013. Another calling for 20,000 DOW within 18 months. These type of calls do not occur at the lows.
Many stock splits. Stock splits do not occur at lows. In fact, they occur at highs.
Many mergers. Again, mergers do not occur at lows. In fact, they occur at highs.
MARKETS like CHINA,BRAZIL and others entered their own bear phases before our markets.
A PLETHORA OF IPOs AND SECONDARIES
This adds supply to the market but more importantly, another characteristic that does not show up at lows, but near the highs. To make matters worse, investment banks as usual, learned no lessons from the late 90s about bringing out companies public with $5-10 billion valuations that do not have even $100 million in sales and lose money. They get their fees. Investors get screwed.
SEMICONDUCTORS
Another important leading sector is the SEMIS. They have led the market for many years…both up and down. When they topped in March, I became worried. When they rolled over in mid-May, I became double worried.
Finally and most importantly, I have taught you that nothing bad happens when major indices are above the 50 day moving averages…and only bad happens when below. The final dagger occurred last Wednesday when markets dived below on volume. Since, nothing but distribution. On a daily basis, we are seeing weak closes, another important sign of a bear phase.
Do not get the urge to listen to the permabull Wall Streeters during bear phases. They will cost you a bundle. You will be hearing the terms OVERDONE,OVERREACTION,UNDERVALUED,CHEAP and all that crap. Be careful!
I am also amazed at the complacency i HAVE SEEN SO FAR.After stating my bearish stance on national Fox News tv a few weeks ago, I received a bunch of not only emails disagreeing with me but actual hate mail. People just never want to believe the market can go down. As I stated numerous times in the last bear, there is no way of knowing when a bear phase will end but just like we know the characteristics that show up during a market top, we know the characteristics that show up during a market bottom. I do believe this market has a date with the 200 day moving average which is only a couple percent lower. A break below the 200 day moving average and get the fork.. At this juncture, I am inclined to believe it will occur. And to answer the question on whether the market could have another flashcrash, I wouldn’t bet against anything as I do not believe the masses are prepared and I do believe the masses still have the buy the dip mentality.
On a short-term basis, major indices remain very stretched, expended and oversold to the downside. But again, oversold could stay oversold for a while. But I suspect the 200 day average could first provide the market with some sort of relief rally. Any rally should be sold as I BELIEVE THERE IS GOING TO BE MORE TIME AND PRICE IN THIS BEAR PHASE.
My last point is on the economy because many weeks ago, I told you and my listening audience I thought the economy had topped. Since and unfortunately, this has occurred. What did I see? Every quarter, I visit numerous retail outlets. Every quarter, I speak to select people in differing industries. These are ordinary people either running or working at businesses. To a person, they all said that things had stalled…that there was no upward trajectory. I then heard the heads of Walmart and Target say that the consumer hit a wall. HINT: Never argue with what Walmart says. I love when a pundit says the news is just limited to Walmart. They only do $400 billion in sales. Why listen? The last and most important clue…commodities topped indicating demand was indeed softening. Weeks, later, all the worsening news started to come out.
My biggest worries are simple.
The Fed is out of ammo. They are already at zero percent. Yes, they can print more money but that only crushes the dollar, lifts commodities which in turn hurts the consumer. Crushing your own currency has never worked.
This administration is in dire need of watching the Seinfeld episode where Jerry told George that if every decision he has ever made was wrong, then doing the opposite must be right. Massive deficits, massive amounts of new regulations, threats of tax increases, demonization of almost every industry and a health care joke of a bill that does nothing more than add more costs to hiring…even though they say it will lower costs and lower the deficits. There is only one outcome from assinine policy…and we are seeing it. Obama is not dealing with a sluggish economy. He is causing a sluggish economy.
So I worry. As I wrote last time, it is only bad when markets go down. It is now bad. Markets are going down…and we may have only seen the beginning as the trust factor remains very low. Markets are quite smart in the long run.
Gary Kaltbaum owns Kaltbaum Capital Management, LLC (“KCM”), an investment adviser registered with the U.S. Securities and Exchange Commission. The opinions expressed herein are those of Mr. Kaltbaum and may not reflect those of KCM. The information offered in this publication is general information that does not take into account the individual circumstances, financial situation or individual needs of an investor. The information herein has been obtained from sources believed to be reliable, but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results.
