While the current market is choppy and appears to have a downside bias in the short-term, the data also seems to suggest the longer term bull market trend may be topping as well. We won’t know until several months from now, but it’s still a good idea to review the facts:

 

  • The current bull market began in March of 2009, and is now over 2 years old. (Most of the last few bull markets did not last much longer than 2 years).

 

  • There is an abnormally high amount of distribution in the market (over 6 distribution and/or stalling days on each of the major indices for the past 5 weeks).

 

  • Industry group leadership, at least for now, seems to be rotating towards more conservative investments.

 

  • A mostly positive earnings season was not a powerful enough catalyst to continue the market’s upward trend.

 

  • Positive political news (like the OBL incident) only results in very short term rallies that institutional investors often sell into.

 

  • Several major political issues are still looming over Wall Street: the lack of significant, sustainable job creation through incentives for starting or expanding small businesses, the housing inventory glut, overspending and the national debt, and the Dodd-Frank Bill (only 5% of which has been implemented).

 

  • Favorable economic news, and the reaction to it, has been fairly weak at best.

 

  • Wal-Mart (which many consider to be an economic indicator in and of itself), reported decent results, but domestic growth was muted – suggesting a poor economic environment. The recent price action suggests Wall Street agrees.  

 

  • Many leading stocks have begun to confirm the downtrend of the overall market.

 

 

For this outlook to change, the indices would have to stage a robust follow through day, where a sufficient inflow of demand (i.e. Institutional Buying) balances out all of the recent distribution we have seen. Following a few days down in a row, the market usually makes an attempt to keep the short sellers honest by bouncing higher, especially the most oversold issues. But after so much selling, it’s disappointing that today’s low volume bounce on mostly beaten down former leaders and commodity stocks is the best the market can do.

 

We are not in the prediction business. We simply interpret the market action.  Until proven otherwise, I have to think the path of least resistance is lower and consider capital preservation as my number one priority. Keep in mind the market behavior is never black or white. It is always dynamic and can change direction at a moment’s notice. That’s why in addition to following the daily action of the major market indices, the market leaders and the stocks in your portfolio, I also invite you to follow my observations here in the MarketSmith Community, and on Twitter.

 

Best Returns,

 

Scott O’Neil

President

MarketSmith, Incorporated