BEARISH ACTION!

In my past couple of missives, I told you markets were rallying right back into resistance. This is the “normal” action I told you about that occurs in bear markets. To review…when markets gets extended and stretched from the norm, eventually they move back towards the norm before resuming the major trend. In this case, the trend remains down. But that’s the trees. The trees was the anticipated bounce as well as the stalling at resistance. The forest is simple…this remains a very bearish market, not only here but across the globe. Let’s pick it apart.

It is bearish that after a nauseating drop, many are still calling this a normal correction. I am stunned by some of the “don’t worry, everything will be ok” commentary considering we just came off of the 2008 bear market. Amazingly, the past three covers of Barrons indicated nothing but bullishness. For the most part, strategists have not budged with their end of year targets..

It is bearish that I have only one group in a bull market…and that group is GOLD. This is not good news.

It is bearish that FINANCIALS continue to lead down. This was one of the most important clues in me telling you way back in May that the market would be on borrowed time. On many occasions, I stated the financials were acting just like they did in 07-08.

Speaking of financials. Do not ignore Bank of America. I continue to wonder just what is going on as the stock was being pummeled before Warren Buffett stepped in. I continue to worry that they had to raise $13 billion when they said they didn’t need to. This bears watching as financials have sold off since that news.

It is bearish that world markets are still imploding. As I have told you, bear markets are directly correlated with the action in world markets. I cannot help but worry about the action in the German Dax as well as others. China, Brazil and a few other countries topped way in advance of ours.

It is bearish that about 1 out of every 10 stocks is in good technical shape…and frankly, I think I am being nice.

It is bearish that the recent rally was exactly what a bear market rally looks like. I coined the phrase that bear market rallies are sharp, quick, make you feel good, get everyone talking about it, suck you in and bury you soon after.

It is bearish that most major indices did not even get close to the declining 50 day moving average. The only index to make it was the Nasdaq 100. Please notice that it hit the 50 day to the penny and failed. You may also want to look at the Nasdaq which failed right at the 2600 level…the place I told you was the major breakdown for this important index.

It is bearish that cash in mutual fund’s coffers is still below 4%…a very low level indicating a lack of ammo but more importantly…this will mean they will have to sell if redemptions start to pick up. And just to give you an important lesson, it is these redemptions that lead to more selling…which leads into deeper bear markets.

It is bearish that we haven’t even begun to see what I call “the coughing up stage!” This is the stage where everyone finally recognizes this is not a correction but something much worse. At that point in time, selling really begins to pick up.

Lastly, and as I have told you, my big worry is that the beginning of this big drop reminded me of big bear markets and not something more garden variety. Of course, we will only know this in time.

There are other things I can go over but I gather I have already ruined your day. The question is whether there is any light at the end of the tunnel. This second…not much. If recent lows can hold for a while and start stair-stepping up, that would be a start…but can’t go there just yet. Here are those levels that will need to hold:

About Dow 11,000 which would be the bottom of the trendline off the recent bearish wedge. And then of course the lows would come into play at 10,604.

About S&P 1150 and then 1101.

A break of these levels…especially the lower number…and good night. This would mean the NDX and the NASDAQ would be breaking their lows also.

This is classic bear action. There is no way around it. The topping out process was classic, the drop was classic, the reaction to the drop was classic, the rally into resistance was classic and now the resumption of selling is classic.  And the most important point which was classic is how the market telegraphed the major economic slowdown before the numbers came out. Only now are people worried about another recession. This report warned you months ago about what was to come.

Bear markets are painful and in the case of the past 2 bear markets, brutally painful. I have not seen to this date one characteristic of a potential bottom show up. Just like tops and bear markets have their characteristics, bottoms and bull markets have their own. For sure, we are going to continue to see some wild action both up and down. For sure, we are going to have a lot of news-driven events like another massive spending bill and a QE3. I am not so sure the markets already know this and could care less.

I will continue  posting more government waste as well as my opinions of Washington DC  at garyk.com.

 

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.