The Waiting is the Hardest Part

Markets are once again proving their resiliency. The S&P 500 and the NASDAQ has reversed directions every other week for the past six weeks. This yo-yo effect smacks of uncertainty for the near term direction of the markets. The NASDAQ is down 11% over those six weeks, while the S&P is off 10%.

The market continues to toy with very important support levels (S&P 1040 & NASDAQ 2139) while it meanders back and forth, trying to pick its next big move. When the markets start the day up only to finish off down, that action is a called a bearish reversal. It's the kind of activity that eventually wears out those who are still bullish and trying to buy the dips, or those who are still in and haven't yet seen a need to take action to preserve capital.

On Thursday and Friday we finally had days that started strong and end even stronger. That is the type of action that will be necessary for the bulls to regain the upper hand in this market malaise. The negative to the week ending price progress was that one again there was a lack of volume for such a high percentage up move. Volume demonstrates conviction. It shows widespread appeal associated with that directional move. Therefore when the markets move over 2% one way or the other and the volume is lighter than the recent average activity, one can conclude that it was only a few players who orchestrated that development.

The market has yet to really identify if this latest downturn is just a correction in an ongoing bull market or are we at the end of a cyclical bull run, in an enduring secular bear market. That is the million dollar question! Many highly respected market observers have diametrically opposite views on where we stand today. The reality is that more time is needed for the market to determine its next primary move.

Should the markets break below the listed support numbers the odds are high that another 10% correction could take place. The markets actually have to break above 1170, before a safe call could be made that the correction is over and the bull is ready to resume. That is not to say that early trades can’t be made in this environment. It’s just that if the market moves opposite of your selections those purchases will be just trades – and not long term investments, unless you enjoy taking losses.

Should the market go in the direction you assume, you will have gotten an early start and a better price than had you waited until the risks were reduced. Currently, the risks are very high that this market could move against any long or short position that you put on or own today. From a technical perspective, the charts have shown a series of lower highs and lower lows. That establishes a negative trend which will remain in place until something changes for the better.

This week the American Association of Individual Investors showed little change in sentiment from last week’s numbers. 34.5% are bullish and 43.1% bearish. Bullishness usually falls to less than 25% and bearishness increases to 55% at major market bottoms. We have not seen that yet.

The trade deficit rose to the highest level in more than a year, according to the Commerce Department Thursday. Imports dropped by 0.4% and exports declined 0.7%. This shows weakness here at home as demand for goods decreased, but simultaneously demonstrated demand for our goods abroad has declined as well. Some of the export declines could be a result of our strengthening US Dollar causing some prices for goods to become less competitive overseas. So the next million dollar question is; with buying here in America down, and our selling to other countries slowing down, will it lead to a second half global slowdown or worse a double dip recession?

The trade deficit (the difference between exports and imports) rose to $40.3 billion in April, the largest deficit since December 2008. The silver lining however is that compared with the first four months of 2009, exports this year are up 17%, and imports are up 20%, as global trade appears to be recovering from its worst decline since the Great Depression. It is imperative that this positive trend continue for global economies to mend.

It is truly concerning that a sustainable recovery could occur while mortgage applications for home purchases are down 38% from a year ago, and the level a year ago was down almost 20% from the prior year. The housing industry is one of the largest job creation businesses for any economy. With housing come jobs. Job growth and wealth creation are necessary components for the economy to truly get better and the markets to run back to and past their old highs.

I am very concerned about the near term direction of the markets. The best advice if you’re an investor is to wait out the current daily inverse swings – be patient. It is strongly recommended to employ stop losses, setting the level just below the recent lowest price, for your specific securities.

If you are a trader some of the commodity plays look attractive. We use Exchange Traded Funds and currently have exposure to gold (GLD), gold miners (GDX), silver (SLV), sugar (SGG), and natural gas (GAZ). We use protective stop losses on all these investments as well. Some of the other commodity ETF’s are coming into our buy zones, but we have not added any new positions yet.

Shakespeare once wrote, “Discretion is the better part valor,” which is usually taken to mean that caution is better than rash courage. Proper judgment is better than unwarranted bravery, particularly when it comes to your money. In this market environment that’s pretty sound advice.