Why Stocks Look Vulnerable

by Mitchell Clark, B. Comm.

More reality is creeping back into the stock market and the bear market rally looks vulnerable. With so much money sitting on the sidelines, a lot of institutional investors took the opportunity early this earnings season to nibble away at some long-term positions, as well as actually trade the market. There’s no doubt that the stock market’s been strong since achieving its new low in early March, but I think investors need to be very cautious right now. The news isn’t good enough for any sustainable stock market rally.

I do recognize, however, that virtually all capital markets do seem to achieve extremes, particularly in the stock market. That being the case, the market may not actually retest its March low, but actually bounce around in a new trading range around current levels. The S&P 500 Index seems poised in my view to trade in a big range, say between 900 and 750, for the near future. It’s not a trend; only a trading range within a bear market.

Also looking weak here are commodities. The price of gold is really taking in on the chin and even in the face of several global crises, it can’t seem to get over $1,000 an ounce. Oil is behaving predictably on the economic news of the day and it seems poised to trade around its current level of approximately $50.00 a barrel.

The stock market is particularly vulnerable as we come out of first-quarter earnings season, because investors will only have economic news to trade on. There isn’t going to be much more in terms of monetary or fiscal stimulus measures, because policy makers have pretty much run out of options and money.

So, don’t be surprised if stock prices pull back once again and the market gives up some of its recent gains. First-quarter earnings have so far been uninspiring, but pretty much as expected by the marketplace. Sales and earnings aren’t growing right now and this is why the recent bear market rally has been more of a technical bounce, rather than a reversal.