Why Investors Have Been Heading for the Exit

“Calling the Trend” Column, by George Leong, B.Comm.

A brutal day on the markets last Thursday, with extreme selling in the last hour that drove the DOW to briefly below 10,000 near the close, before rebounding to 10,002. The S&P 500 lost 3.11%, while the Russell 2000 was down a whopping 3.44% to below 600. Triggering the selling was the news of the deficit and debt problems in Greece and Portugal, yet this has been known in Europe for months. Clearly traders used it as an excuse to take money off the table. The fear is that the crisis could spread and impact other members of the European Union and set back the economic recovery.

Markets in Asia also followed the selling in the United States. The Chinese Shanghai Composite Index (SCI) fell another 1.87%. There are concerns lingering on a potential real estate and banking bubble in China, which would be devastating and impact other world stock markets. Add this to the concerns in Europe and you understand why investors are exiting.

The fear now is that the economic recovery could be at risk and additional stimulus would be needed, but raising more capital to fund the stimulus could be an issue given the mounting deficits and debts of many of the world’s top economies. The last thing President Obama needs now is renewed weakness in the global and U.S. economies, as he is counting on economic growth to fuel his jobs growth this year and beyond. The U.S. deficit and debt are already way too high and adding more hundreds of billions in stimulus would be tough, although it would be necessary if the economies sink.

In addition, the weak first-time claims report also helped to drive the negative bias. The VIX surged on the increased fear and desire to sell, as traders scramble for Put options.

The market breadth is weak, as there is little interest in buying at this time. The S&P 500 is below key support of 1,060 to 1,080, threatening new support at around 1,049. The market trend is negative, with 72% of U.S. stocks above the 200-day moving average (MA), down from 79% a week earlier and 86% a month ago. The charts do not look good especially given the weak Relative Strength. Support will be from an oversold condition.

Watch for resistance, as stocks move higher. The market needs fresh catalysts and leadership to drive it higher. Technology was the driver in 2009, but has been struggling this year. Banks are also trading cautiously and looking for clues from President Obama, who recently said he did not want banks to get too big, which is not sitting well with markets due to the perceived interference.

The key this week will be the Retail Sales report on Thursday. Retailers have been reporting January same-store sales, with the early results mixed so far. Indications are that December was not as strong as expected.

Be careful at this time and make sure you have stops in place. Make sure stops are not set too close or you could be easily taken out and miss a potential market bounce.