The Bear Arguments Still Out There

With everything “all good” today, we thought it might be of value to echo Dave M.’s early morning thoughts with a “wait a second, does the world change overnight?” reminder of caution.

We receive an inordinate amount of market newsletters, research reports, and newsfeed articles, most of which we can safely discard. But every once in a while there is an angle on the market, a storyline, a different look at a chart or a new fact that makes it interesting and worthwhile.

We’re not sure we would put this angle in the “absolutely must read” category but nonetheless interesting.

We received three separate newsletters yesterday all touting the August return of the “death cross”. The “death cross” is a technical intermediate to longer-term bearish signal where the 50-day moving average crosses below the 200-day moving average, in this case on the SPX.

What gets our interest on top of this is chatter from the Elliot Wave crowd, talking about Fibonacci retracements of 50% from the 2009 bottom to the 2011 highs. That 50% retracement would take the SPX to around 1010-1040, which just so happens to be the area of summer 2010 lows. Pieces fitting in rather neatly for the technicians.

But to really make the bear case, and of even more interest to us, are the performance of some very different indices (before today’s global rally).

• The Nikkei making 2-year lows
  
• The German DAX making 22-month lows
  
• The Dow Transports making 52-week lows
  
• The EEM, Emerging Market Index ETF, making 52-week lows
  
• The XLF, U.S. Financial Sector ETF, making two-year lows

And several other rather important measures showing at least 52-week lows or more. So the “bear case” is that the overall market or SPX, should also follow suit and make 52-week lows at some point rather soon, or simply put, test those Summer 2010 levels around 1010-1040.

We are not sure 1+1 = 2 here. Even Jim Cramer made some good points last night on technical analysis, pointing out how “it works when it does and doesn’t work when it doesn’t”. He was specifically referring to one analyst’s call that a bottom has very likely been put in for the year, “except if 1100 is breached to the downside’. Really, how is that at all helpful?

“Dr. Doom”, NYU professor, economist and author Muriel Roubini, was also making the rounds yesterday, as he tends to do during any new financial “crisis”.

“I thought a few months ago that the perfect storm would be 2013,” Roubini said in an interview in London. “But now, the economic weakness in the U.S., euro zone and the U.K. is front loaded. So we’re going to double dip earlier. The climax of it could be 2013, or it could be already earlier. It depends on what policy tools are available.”

The bull camp continues to point to any number of market positives today: the “good news” out of Europe, low stock valuations, strong corporate earnings growth, the chances for QE3, and the fact that so much bad news “already priced into” a forward looking market.

We are not sure where the truth lies and we doubt anyone does. But with the VIX remaining over 30, that would strongly indicate that the market still believes that uncertainty is rampant. We still think positions should be very small and very cautious in either direction.

Editor’s Note: Any other bearish thoughts out there? Give us your thoughts in the comments section below.

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