Trading Action Underscores Market Hesitancy

by George Leong, B. Comm.

Monday saw a bounce in stocks, but, as evidenced by the trading action, there was hesitancy after the jump. Traders clearly are hesitant about bidding stocks higher.

As we move forward into the third quarter, I expect to see increased scrutiny towards the economy and whether economic growth will turn positive later in the third quarter or fourth quarter. The Federal Reserve feels that this is possible, but I’m not convinced — at least in regards to the strength of the recovery. In the best-case scenario, the country’s GDP could turn positive later in the fourth quarter, but don’t be surprised if it does not. Remember that the World Bank downgraded its global GDP forecast last week to a 2.9% contraction. The reality is that the fragile jobs and housing markets continue to be a significant factor that’s derailing consumer confidence and spending.

Pundits feel that the unemployment rate could edge higher towards 10%. Across the Pacific Ocean in Japan, the country’s unemployment rate jumped to 5.2%, the highest level since April 2003. Some pundits see a similarity between what the United States is going through and Japan. If this is true, the U.S. economy could be struggling for a few more years before a return to strong growth.

Also consider that, given the recession, Americans have been focused on their savings, something that was largely absent over the past two decades. But with jobs at risk and many home values below their respective mortgage amounts, it is not a good time to spend indiscriminately. This applies to the majority of people. The last thing you want to do is to lose your job or house and have no money in the coffers.

As a trader and investor, the key is to remain prudent. Look for trading opportunities on major market dips. Of course, this assumes that the March lows represent the bottom for the market. They appear to be, but the recent downside breach of the breakout levels (DOW: 8,400; S&P 500: 900-950; NASDAQ: 1,700; Russell 2000: 475) brings this into question. As long as markets can hold and avoid a major correction, it should be fine. Watch the breakout levels. A major breach could see a move towards the lows. The positive is that investors are buying on dips.

We have seen a bounce in stocks. As of June 29, about 75% of all U.S. stocks are above the 200-day moving average, up from 68% a week earlier and 69% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving average continuing to trend higher.

Watch your active positions. Make sure you have some stops in place and take some profits on any big winners. The objective at this time is preserving capital and avoiding major risk of capital losses. In this way, you will have available trading capital once the market turns higher in a sustainable trend. You can also have some put options in place to protect against a major downside move in stocks.