If there are no ups and downs in your life, it means you’re dead (anonymous)
ALWAYS ALWAYS ALWAYS pay attention to what the market is telling you. There are some out there who don’t believe this mantra but by being objective I can tell you that reacting to the evidence can certainly save you from disastrous results later. This past week brought us so many clues and information about markets that it may border on excess, but let’s try and ferret out the data.
Remember Monday? I sure do, and the melting of gold, silver and other commodities which fell under a ton of selling pressure. Sunday overnight China data showed a bit less growth than anticipated and that opened the argument to global growth slowing. Is it a bit premature? We’ll have to see but certainly the evidence is mounting. Back to gold and silver, which dropped nearly 10% on cascading volume and rumors of European liquidation (Cyprus, others). Whether it’s true or not, when there is a known seller then you step aside and wait it out. No knife-catching here. In percentage terms it was the biggest pasting ever. If you understand trading/investing in commodities then you know it is mostly done on margin to take advantage of the leverage.
Well, if you are long gold futures on margin or even the Gold Trust with no protection and it gaps down and continues lower then you’re going to be taken out of your position(s). And when you are forced to sell something you cover by selling other things – and the beat down goes on. So, fear was in the air early in the day and then the tragic news of the Boston Marathon hit with little reason/explanation – and uncertainty enters into the equation. Result? More selling, the indices dropped nearly 2% at the lowest point of the day. A bit of a rally ended Monday and powerful gain Tuesday but only to be given back quickly Wednesday and Thursday with triple digit losses for the Dow Industrials. Meanwhile, the VIX has started trend upward while the indices flirt with their respective 50 MA’s.
The week was top-heavy with earnings reports all week long and as expected the response was mixed. GE, Ebay, and IBM were hammered as they cautioned about the future while Chipotle and Google flew higher on solid earning beats. Next week brings the heaviest number of earnings, with Apple and Netflix among the highlights, I expect much of the same mixed overall results.
Besides the weaker China data, Europe was in the news with some downbeat economic numbers but the biggest ding not much talked about was the International Monetary Fund (IMF) lowering their global growth forecast and that of the US. This may not have been THE catalyst but it certainly was a firestarter. Strong gains for the indices so far in 2013 portray some good growth in the coming months (Aug-Oct) but much of the gains were probably due to heavy liquidity conditions from accommodating central banks. That’ll end some day, and there are always those wanting to ‘front run’ the end of the ‘punchbowl’ party. Not a prudent exercise in my judgment.
In any event, the technical condition of the market sustained some damage this week with three massive distribution days. When the big players are leaving to the sidelines you do NOT want to be the one trying to pick up the pieces. Markets are sitting around support areas and could bounce but with the recent activity and elevated fear levels we’ll have to see how things materialize. It may be too early to start turning bearish but the signs are starting to appear. Don’t ignore them.