Even the most bullish of bulls have finally seen the light. From this weeks Stocktwits post.
A banking (currency) system is an act of faith: it survives only for as long as people believe it will” – Michael Lewis, Boomerang, 2011
Only 15 days ago, there were so many charts that looked ready to break out and participate in a year-end market rally. Fast forward two weeks of political inaction in the face of rising European sovereign debt yields and equity markets across the world look like Niagara Falls. A typical story of 2011 – the obvious rarely happens, the unexpected constantly occurs. Constant false breakouts and breakdowns that 2011 brought has gradually conditioned market participants to shrink their investing horizons. For better or for worse, we have all become traders.
There is an apparent crisis of confidence in capital markets. No one wants to own European bonds, which makes the cost of borrowing unattainable for countries like Italy and Spain. The lack of trust often leads to liquidity crisis and a liquidity crisis is the shortest way to solvency crisis. In such an environment, no one can blame investors for being defensive. People are just going to cash until the political mess in Europe is resolved in one way or another.
For the week, the St50 momentum index lost 5.7%. $QQQ and $SPY fell 4.6%. There is no point highlighting certain sectors or giving individual assessment to stocks at this phase of the market. Relative strength is a powerful stock picking criteria, but there are times when equity selection is a waste of time and stocks just move together in groups. This characteristic is typical for downtrends.
Market sentiment is at a point where the major indexes can either crash 10%+ or rally 5-10% on some unexpected news. Fundamentals play little role here, obvious levels of support and resistance are irrelevant, and stocks trade on headlines and pure emotions. This is certainly not a time to be aggressive and for many it is wiser to just sit it out on the sidelines.
Capital constantly flows somewhere. In times when the return of principle is considered more important than seeking higher return, capital goes to perceived safety – U.S. dollars, U.S. Treasuries, Japanese Yen. The return that those asset classes provide is minimal, so money will not stay there forever. Sooner or later, capital will find a higher yielding asset to flow into. It has always done it and this time won’t be any different. Price action will be a safe leading indicator. We just have to lay low until the market makes her next move.