Market Turbulence Or Something More?

Posted by jeff

Wed Jun 2nd, 2010 07:27 AM

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 2nd, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.

It has been way too long since my last post....apologies. I went back to the dark side (Wall Street) about six months ago and have been busy ramping up coverage of various industries. I hope to be much more active on the site again and I am looking forward to the Urban Digs 2.0 launch. So let's get down to business. It is no secret to anyone that the stock market acts like crud, actually stock markets worldwide act like crud. The question becomes, is this a normal bull market correction, is it an "Asia crisis type" intermediate-term correction or the end of a cyclical bull market within a secular bear market in place since 2000?


It is not happenstance that the market ran into trouble around 1,200 on the S&P 500, which was the area that the market really fell off a cliff from, back in late 2008 (circa Lehman Bros. failure). I noted the resistance at these levels back in November of last year (No one Here But Us Chickens) and opined that there would be more skepticism about the rebound at some I admitted at the time I am usually too early.

So the market has experienced a fainting spell just under major resistance.... predictable. But is it something more? Certainly the PIIGS situation is on everyone's mind, add some slowing in China and you have the makings of a "here we go again moment". (I will be addressing the China situation in a future post.) But from a technical standpoint, here are the key features of the chart above. The market, which had been in very good shape, trading above both its 50 and 200 day moving averages (with great breadth- meaning many many stocks and industry groups were participating in the rise), experienced a pull back to its 50 day moving average and then dove through its 200 day during the "flash crash". Vince Boening, the former DLJ market technician taught me years ago that when a market with a strongly positively sloped 200 day moving average (he actually used the 150 day), has a sudden breakdown, there is a natural dynamic tension for a snapback. (This lesson actually took place during the Asia crisis of 1998, when the market had a big swoon, but soon recovered and went on to new highs - Vince Boening was practically the only technician who stayed bullish through the "intermediate-term correction"). Right on cue this time the market had a huge rally catalyzed by the Trillion Euro bailout announcement.

Since that time, the market has begun to take on a much more toppy posture, rolling back over, breaking the flash crash lows and 200 day moving average again, and pushing the 50 day moving average into a negative (downward) slope. Recent action is now turning the "primary trend indicator" the 200 day moving average into a flat slope. The latest action has prompted highly regarded technicians like Stan Weinstein and Carter Worth (Vince Boening's disciple) to become highly suspect of this bull market's longevity. I too have become much less sanguine regarding the intermediate-term outlook (6 months) for the market. However, I would note that the market is now very oversold as illustrated by the MACD indicator at the bottom of chart above. It is very likely that we will see a rally from here, that will work off this oversold situation. My bet is that the rally conks out around 1,150 on the S&P tracing out a "head and shoulders top". Let's hope I am wrong - until the 200 day moving average becomes negatively sloped I won't turn fully bearish. The strong market and active fund raising of Wall Street has proven salubrious to the New York City economy and real estate market as Urban Digs has acknowledged. My outlook is turning more cautious with the technical deterioration I see in the market.