Bearish sentiment and economic troubles continue to take their toll on the markets, but certain sectors look good and a buying opportunity may be right around the corner, writes MoneyShow.com senior editor Tom Aspray.
Even though global stock markets were able to stabilize on Friday, the sharp declines last week added to the overwhelming negative sentiment in the markets.
The technical formations prior to last week suggested that stocks were vulnerable to decline, and the short-term outlook turned more negative Tuesday.
Of course, the magnitude of the decline was a surprise to all, and Thursday's sell-off was similar to the panic selling that occurred in early August. This gave the investment firms and major banks some vindication, as they have been racing each other for weeks to cut their forecasts for the economy and lower their year-end targets for the S&P 500.
Even the Federal Reserve joined in, as their new plan to lower long-term rates was accompanied by the comment that there are "significant downside risks to the economic outlook, including strains in global financial markets," something that undoubtedly spooked an already skittish market.
Though I think the Fed’s concern is valid, the general consensus of economists makes me more skeptical. Many believe that if we are not already in another recession, we will be soon. If this turns out to be the case, it would be the first recession that was predicted by most as it was occurring.
These predictions comprise the majority of market sentiment, even though last week’s housing data was better than expected; existing home sales jumped 7.7% in August. Nevertheless, a survey of 100 economists painted a bleak picture of housing, as they expected prices to drop 2.5% this year, and then only rise 1.1% through 2015.
In my experience in the market, the majority is rarely right. When you have a consensus view—especially one that persists for some time—I always look at the technical evidence to see whether it supports this consensus.
For example, my volume analysis on gold turned positive in 2006, but sentiment toward gold was often mixed. In the fall of 2009, however, public sentiment on gold was overwhelmingly positive, right before gold topped out on December 1.
This began a months-long decline. The correction was severe enough to turn enough of the bulls negative on gold, which created another good buying opportunity.
Therefore, while the short-term outlook for the global equity markets is decidedly negative (as I detail later), I think by year's end the stock market may surprise many of the current bears.
Of course, the problems with the US economy and our leadership are just magnified overseas. Many are suggesting that the Eurozone will eventually break up, as their leaders fail to comprehend the severity of their debt problems.
The focus remains primarily on Greece, but the contagion fear is still hurting the markets. The economic news last week was also grim, as the Eurozone purchasing managers' index dropped in September for the first time in two years. Rating agencies downgraded many Italian and Greek banks, which did not help. (I would love to see someone start rating the rating agencies.)
Late last week, the G-20 announced that it would take “all necessary action” to shore up the banks and financial markets. I think they will eventually figure out the necessary actions and move accordingly.
Unlike the US stock market, the German Dax Composite has continued to decline after the sharp drop in late July. The Dax was sharply lower early last Friday, but closed higher, and could have formed a very-short-term bottom.
Things weren’t that much better in Asia, as selling was heavy. News that China’s factory activity declined in September reversed some of the positive sentiment that had been building for their economy.
The Hong Kong Hang Seng Index had a rough week, down 7.9%, and as the chart shows, the long term 50% Fibonacci support was broken. The 61.8% support stands at 16,544, which is 7.5% below Friday’s close.
The market is likely to get a good test from the economic data this week. On Tuesday, we get new-home sales figures, the S&P Case-Shiller Housing Price Index, and the latest readings on consumer confidence.
Wednesday will bring the latest numbers on durable-goods orders, followed Thursday by the final reading on second-quarter GDP, jobless claims, and pending home sales.
On Friday, we get the numbers on personal income and consumer sentiment, which is likely to be watched closely by Wall Street.
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