Critical Juncture
Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of June 30th, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.
The stock market has been tracing out a potential top for the last 6 Mos. (See my recent piece "Market Turbulence Or Something More"). To even the most novice chart reader a "Head & Shoulders" top is now plainly in view. Technical analysis only works about 70 percent of the time or lots of devotees like me would be rich and retired. However, the best way to think about technical analysis is like a traffic light. Following on this analogy we have been in a "yellow light" mode for a couple of months - PROCEED WITH CAUTION.
As can be noted from the chart above, we are now on the verge of seeing a red light flash STOP FOR YOUR OWN SAFETY. If the market violates the following levels on a closing basis SPX 1,040, DOW 9,750, COMP 2,139 and RUT (Russell 2000) 607, it will have transitioned into what my buddy Stan Weinstein calls Stage 4. This is the declining phase in a stock pattern (for you chart aficionados note the "dark cross" about to take place, where the 50 day moving average (MA) crosses the 200 day MA). In this case, major support exists in the 850 to 950 range on the S&P. Due to the imprecision of technical analysis, all that can be said is that this is the likely first stop, but as Stan said to me yesterday "When I called the 2007 top for you I had no idea the bear market would last 2 years". If the levels mentioned above are not all exceeded to the downside on a closing basis (some were yesterday and Tuesday, intra-day and on a closing basis) it will set up a "non confirmation" followed by a rally. That said, in Stan's words "This market is screwing up big time". So the odds are now high that the breakdown into Stage 4 will happen sometime in the next couple of months, regardless of the near-term action. Not to say that this is fate accompli. Back in 1975, after a huge run-up from the 1974 bottom, the market waffled around for 3 quarters before continuing its bull market ascent. I know of at least one firm that was committing over $100 million to buying stock at Tuesday's close, betting that the market will not break down....at least not right now . However, considering that we are in the midst of a historic de-leveraging cycle, a bear market would be all the more de-stabilizing and thus the "yellow light" status should be respected and a "red light" vigilantly prepared for. A bear market would obviously be a negative for New York City residential real estate....something to keep in mind.
Posted by Fred
Thu Jul 1st, 2010 09:51 AM
what if the next phase is about the transition away from the USD as the fear trade recedes but counterbalanced with stagnant fundamentals in the US? in that scenario, US indices could simply tread water for a while, and currencies that benefit from a retracement of the USD back to the 2009 year end lows, would benefit?
the main correlation i see today is USD down, Euro up, commodities up, non-US financials up big time, gold down and Treasuries mildly off.
i think the likelihood that we enter the stagnation period sooner than later is much higher than the US indices going either up or down. then of course we are one step away from the endgame: stagflation. actually, i think the market may already be factoring in inflation, but very quietly. for example, copper futures are off but miners are up. that could simply be part of the reset to normal backwardation but my gut says it's positioning for the inflation storm.
i still don't know how low growth / high inflation will affect manhattan prices but i have a hard time seeing a scenario where we escape the need to cut city services, raise revenue and don't see a drop in housing prices.
Posted by jeff
Thu Jul 1st, 2010 11:17 AM
My guess is that with every country in the world that is not going on austerity of some kind, raising interest rates, deflation will become the immediate concern. The printing presses will start later. I sold the bulk of my gold in the last few weeks as the initial sell-off will see a correlation of all assets as they are sold to raise cash. I am long the $ ETF as a safe haven. Will definitely come back to gold later....I don't expect the uptrend to be broken, but I see it correcting and consolidating. Hoping that the inevitable China new stimulus package puts a break on deflation some time around Q4.
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