Yahoo Finance NYSE trader: sell the rally
It's another volatile week – that makes six for the year and counting.
That’s saying something since we’ve only had six weeks so far in 2016. As I have written before, the chaotic selling in the last week of December foreshadowed the start of the year's volatility. It certainly acted as the best predictor that the markets would be dealing with a confluence of negative stimuli unlike we have seen—maybe ever—and we should not be surprised by it. When one of the strongest weeks historically (the last week of the year) turns out to be a bad one, that should be a clue that pain is in the near future.
A lot of pundits, traders, and investors have tried to equate this mercurial market with that of 2008/2009, thereby suggesting that we are on the verge of another crisis. While there are a number of issues around the globe and in the U.S., I don’t subscribe to that point of view. In 2008, there was a financial powder keg created by aggressive marketers (unethical marketers?), shoddy regulation combined with ignorant politicians, unknowing institutional investors investing in complex products, and possibly corrupt ratings agencies.
That’s not today’s market. Today’s version of the scary market has been driven by ineffectual monetary and fiscal policies and the central planners' intractable inability to just stand to the side and let the markets clear. While this brings its own level of angst, it’s not the same. The banks are in much better shape capital-wise than they were in eight years ago and should be able to weather any drawdown or economic hardship that comes to pass. And despite how they are vilified by a few presidential contenders, make no mistake that we will need the banks in good times and in bad.
Market posture is precarious at the moment.
The Dow Jones Industrial Average and the Russell 2000 Index are now substantially below the long term trend lines from 2009. The S&P 500 is getting close to that same position, while the Nasdaq Composite flirts with breaching another important trend line which dates to 2011. On a short term basis, all of the major indices are at oversold levels, and we would expect a bounce here and there. However, despite any modest intraday rallies, I suspect that there is still enough fear in the market that they will be short lived and the path of least resistance remains downward. Rallies will induce sellers to take advantage of the short bump while the shorts will continue to hang on knowing the bias is downward. When will the deep-value guys step in to support the market and pick up bargains? That’s anyone’s guess … but I suspect it will not be anytime soon.
