Bulls are scrambling for cover as the bears have had their way over the last week to July 27, with the blue-chip DOW giving up 734 points, or 5.24%, following a failed attempt to hold above the 14,000 achieved on July 16. With the selling, the DOW has recorded a minor correction, and there could be more weakness in the near term as market breadth and sentiment indicators are weak. However, the selling has created a technically oversold condition and the potential of near-term buying support.
Technology and small-cap stocks have also been selling. The NASDAQ has given back over five percent since breaking above 2,700 to a six-and-a-half-year high. Small-cap stocks are also facing some selling pressure due to concerns relating to the economy.
After being on pace to beat returns last year, the economic- sensitive small-cap Russell 2000 has broken below 800 and seen its gains disappear to a 1.35% decline. Consider that the Russell 2000 was up over eight percent earlier in the year. The NASDAQ is holding to a six-percent gain, while the DOW is up 6.43%. The S&P 500 has retrenched below 1,500 and is up 2.80%. Along the way, several key support levels have been taken out, but whether stocks can hold and bounce back as of late February is unclear.
Triggering the selling have been mixed earnings and renewed fears that the subprime mortgage market may continue to be weak and translate into additional weakness spilling over to the economy. The U.S. housing market also continues to be soft, and I feel this could hamper consumer spending. The housing market may continue to be soft and not see a rebound until 2009, according to market watchers.
I don’t view the bout of selling as a surprise given the soft technical picture we have been seeing and the fact earnings have been mixed at best. I expect stocks to remain volatile due to the pending flow of earnings over the next several weeks. It appears investors are apprehensively trading on earnings, and there have been some large swings because of the uncertainty. I expect this to continue.
Going forward, I remain concerned about inflation, interest rates, earnings, oil, and geopolitical risk. I’m somewhat pessimistic, especially if the economy fails to hold and the housing market and spending fade.
In the near term, I advise prudence in trading, and you should avoid any unnecessary risk