Stock market action lately has been terrible, even with the price of a barrel of oil retreating. This is a strong signal that investor sentiment is very weak and that more downside in stock prices is ahead.
Previously, when the price of oil fell, the stock market reacted by moving higher. Now, investors’ attention has shifted to the economy and, while some numbers seem relatively decent, a lot of data are revealing a deteriorating situation.
So, investors are left with a difficult market environment and I don’t see any change in the immediate future. In fact, the S&P 500 Index is not looking healthy right now and if it moves much lower, this could be mean we get another strong leg downward in stock prices. A lot of investors are now not looking forward to third-quarter numbers. A lot of investors aren’t participating either.
One stock market sector that I’m now watching closely is the financial sector, particularly the investment banks. Over the very near term, the big investment dealers are expected to report terrible numbers. I think that this group will be the leader in any stock market recovery, so in the absence of a strong Merrill Lynch stock price, we’re not going to get any upside.
The fact of the matter is that we’re in a bear market and it’s going to take a while for us to get out of it. You can’t have a bull market in stock prices when the unemployment rate is hitting a five-year high.
So, at the end of the day, there isn’t much good news out there to go on. Just like in previous bear markets, there are a lot of very reasonably priced stocks out there with excellent long-term prospects. Over the short term, however, you just can’t expect much, because sentiment is reflecting the state of the economy.