My, How Things Have Changed

by George Leong, B. Comm.

How things can change in a few days. Just a week ago, the stock markets were flying higher, with four straight up weeks. The winning streak came to an end last Friday and the losses continued on Monday, with the DOW recording the worst one-day loss since July 2. The down day was also the sixth over the past nine days to Monday. But if there was a positive, it was the relatively light trading volume, which, during a down day, is positive. The lack of mass-market participation in the selling is encouraging in spite of the current downward bias. As we move forward, watch to see if the DOW can hold at 9,000, which I feel could be a target and could be tested this week.

The near-term technical picture has weakened to moderately bearish with weak Relative Strength, so we could see more downside moves.

Now we are hearing that the recession, which the Federal Reserve suggests may be coming to an end, could be setting up for another decline. Economists call this a double-dip recession. After the initial economic decline, the economy shows some signs of recovering like what we are witnessing currently, but then the economy fails to gain ground and weakens again. Based on the continued weakness in the housing and jobs markets, there is no reason to ignore this possibility.

A weak University of Michigan consumer sentiment report points to continued weakness in consumer spending and, hence, GDP growth. In the housing area, homebuilding supplies company Lowe’s Companies, Inc. (NYSE/LOW) reported a decline in quarterly profits.

Overseas, we are seeing some economic renewal in Germany and France, but overall there continue to be numerous pockets of weakness in the 27-country European Union. Europe needs to show some leadership.

I’m also concerned with the current selling in Chinese stocks. The benchmark Shanghai Composite Index (SCI) rebounded a modest 1.4% on Tuesday, but remains below key support at 3,000. The chart shows a bearish double top and a break below the trend line. Be careful with Chinese stocks, as a reversal sentiment could drive major selling in Chinese stocks on U.S. exchanges. There is a feeling that the SCI was overextended given that it was up over 80% a few weeks back. I do not see this as a market reversal, but simply as some profit-taking and a readjustment to perhaps a more realistic level. If you hold some Chinese stocks, you’d have made some big gains. Take some profits.

As we move forward, watch for more economic data. We need to see more evidence of economic renewal before markets will rally. It is clear that traders and investors are looking for some catalyst to bid stocks higher. With the summer drawing to an end, we expect increased market participation. Markets could drift for the next several weeks, as investors wait for the end of the third quarter to see if things have really improved.

The key now is to remain prudent and watch your stops. Take some profits on your big gainers in case the markets trend lower.