Things Could Get Worse for the Stock Markets

The bears are crawling just around the corner, so be aware of this. On July 1, the small-cap Russell 2000 fell to an intraday low of 590.57. At that point, it was down 20.73% from its 52-week high, which is a technical bear market. The Russell 2000 has since rallied back above 600, but the move to the bear market condition was a warning that things could get worse in the stock markets. If a 20%
reversal occurs, we could see more losses in the upcoming two quarters. At the midpoint of the year, markets are down between 14.35% for the DOW and 17.85% for the Russell 2000. The NASDAQ is down 17.51%.

Stock markets have closed lower in nine of the last 10 sessions. The bears have been clawing away at the gains to the point where the key market indices are trending lower, below their respective 20-day and 200-day moving averages and searching for support.

The near-term technical signals are bearish on extremely weak Relative Strength, so there could be more downside moves in the upcoming sessions, but watch; markets are oversold, as we witnessed on Monday. The inability to hold at the key moving averages is worrisome, as the indices could falter further in the weeks ahead if we fail to see support buying.

Driving much of the selling has been a combination of a soft U.S. jobs market and continued weak housing domestically, along with continued concerns towards the debt and growth situation in Europe along with potential slowing in Japan, China, and Asia. The weakening Euro/USD combination makes American-made goods and services more expensive to buy for the over 500 million people living in Europe.

The overall market risk is high at this stage. I sense we will continue to see selling after market rallies, as the gains are likely notsustainable in the near term. Until we see improved conditions in Europe and avoid an asset bubble in China, market risk will continue to be high and stocks will be vulnerable to downside weakness. I continue to believe that the best approach in this market is to maintain caution and prudence. The bottom line for you should be capital preservation. Make sure you have some Put options as a hedge against weakness, as I’ve discussed in previous commentaries.

Be careful; this is a dangerous situation we are in at this time.