If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Has This Market Seen Its Top?
06/16/2011 11:59 am EST
The short answer: maybe. A number of experts seem to think so, and whether this is a temporary correction or a true bear market unfolding before us, the ice is thin enough that you should be thinking defensively, writes MoneyShow editor-at-large Howard R. Gold.
On Friday, April 29, two billion people around the world watched and celebrated the royal wedding of Prince William and Kate Middleton.
A million people packed the streets of London to cheer as the newlyweds made their way to Buckingham Palace, while 5,000 different sequences of chimes rang for three hours from the 1,000-year-old Westminster Abbey.
Meanwhile, global financial markets were in a frenzy, as silver, crude oil, and stocks closed near their peaks. The S&P 500 index, the Dow Jones Industrial Average, and the Nasdaq Composite index all reached the highest levels they’d seen since the dark days of March 2009. The Russell 2000 small caps hit an all-time record that day.
They say they never ring a bell at the top of the market, but this time may be different: Did the bells of Westminster ring in a correction much like last year’s, when stocks fell 16% from their April highs? Or did they toll the end of this bull market entirely?
Mark Arbeter, chief technical strategist for Standard & Poor’s Equity Research, believes it’s probably the latter.
In a May 17 note entitled “The Bull Market May Be Over,” Arbeter wrote that the recent sell-off in commodities, lagging emerging markets, a bounce back in the US dollar, “strength in defensive sectors,…and a breakdown in Treasury yields suggest that the market may be tracing out a significant top.”
“We now see a 15% to 20% decline, possibly more, with weakness persisting into 2012,” he concluded.
As a technician, Arbeter focuses primarily on charts, and the charts aren’t painting a very pretty picture now. It’s more like Edvard Munch’s famous painting, “The Scream.”
In fact, he says the S&P has broken through significant support at 1,320, and then even lower at 1,295. Next stop: 1,250, just 15 points below where the S&P closed Wednesday, and where stocks bottomed during the Japanese crisis in mid-March.
Financials have been hit particularly hard, he says, having “dropped to [their] lowest level since December 2010” and having lagged the broader market during its recent rise.
And if you view commodities or precious metals as a safe haven, he has some bad news for you.
“Commodities have peaked, in our view," he wrote. “We think gold could fall all the way to the $1,250 to $1,300 [per ounce] region before the next strong buying opportunity will emerge. Silver has some support in the $30 region, but we think it could decline all the way back to the $20 area before this correction ends.”
Ouch—hope you didn’t buy silver near $50!
Arbeter sees a big shift in the market, away from the so-called “risk-on” trade that held sway from late last August, when Federal Reserve chairman Ben Bernanke announced the latest round of quantitative easing (QE2) to stimulate a weak economy.
That prompted a revival in risky assets, from small-cap stocks to commodities like copper, oil, and especially silver, which gained 150% from its lows to its late April peak.
NEXT: The Dollar Is the Critical Factor|pagebreak|
The Dollar Is the Critical Factor
The main driver of the commodities surge was the weak dollar. Traders and speculators bet against the greenback by pouring money into strong currencies and commodities.
“Over the past couple of stock-market cycles, stocks and the dollar have been negatively correlated. That is, when the dollar is heading lower, stocks are heading higher, and vice versa,” he wrote.
So, stocks rallied while the dollar fell from 2002 to 2008, but fell in the bear market as the dollar rose, and started rallying again as the dollar weakened after March 2009. And we all know what’s happened since last year.
But now, as QE2 ends (and with no QE3 in sight), Arbeter sees that trend reversing: He looks for the dollar to stabilize or move upward for a while, and risky assets to go in the opposite direction.
The US dollar index, which tracks the greenback against a basket of currencies, bottomed out below 73 in early May, and has since climbed above 76 before selling off again.
Arbeter looks for the dollar index to hit 80, if not higher, before this correction or bear market ends. In general, the more the dollar rises, the more stocks and commodities will fall.
Other technicians see trouble as well. “The intermediate-term indicators are negative,” wrote Lawrence McMillan in his newsletter, The Option Strategist. “The oversold conditions may propel a rally towards 1,325, but as long as [the S&P 500] is trending downward, the bears are in charge.”
And Michael Kahn, who writes the Getting Technical column for Barrons.com, mentioned some other bearish signs
for the market.
Fundamental factors aren’t looking too promising, either: the end of QE2, signs of economic weakness, renewed troubles in Greece, and worries about inflation and a slowdown in emerging markets, especially China, which has been the engine of the world economy. The political battle over the debt ceiling might also throw a monkey wrench into the markets.
And of course, we’re in the historically weak summer season. (Remember last year?)
That’s why Arbeter is extremely cautious.
He told me the S&P could ultimately fall to 1,130 (a 17% correction), or even down to 1,000 or 1,020 in the worst case. That’s around the low of last July, and would be a genuine bear market.
I don’t expect it to fall that much, and I wouldn’t be surprised if we have a sharp correction and then a continuation of the bull market, as people like Laszlo Birinyi and Jim Paulsen expect.
But it’s pretty treacherous now, and as I’ve been writing here for a few weeks, it’s still not a bad idea to take some money off the table.
“Right now I’m very cautious,” Arbeter told me. “I can’t tell how low things will go, but there are so many negative things, [and] I think people should be in cash.”
He thinks we may see a “countertrend” rally—going against the bearish main trend—once the S&P hits 1,250. He doesn’t expect that bounce to go much higher than 1,315, and thinks that would be a good opportunity for investors to take profits before the market goes lower again.
“I would be selling here," he said. "Why wait?”
Howard R. Gold is editor at large for MoneyShow.com and a columnist at MarketWatch. You can find more commentary and videos at www.howardrgold.com and follow him on Twitter @howardrgold. He blogs on politics at www.independentagenda.com.
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