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Tuesday, June 25, 2013

Expect Any Bounce to Be of the Dead Cat Variety

Stock II
Stock II (Photo credit: hawkexpress)
By InvestorPlace

A move above 1,600 is likely before the market heads back down to better support

New York, Jun.25, free stocks .- Before I get started with my take on the current state of the markets, I would once again like to thank the InvestorPlace.com community for continuing to value my input. It’s a great honor to be able to step in when the venerable Sam Collins takes a couple of days off.
When I last wrote this column in mid-April, stocks had fallen roughly 3% over the course of five trading days and showed all the signs of giving us the first meaningful pullback of 2013.
From a trading perspective, I was positioned short after the first 1% or so, but after the S&P 500 found solid lateral support around the 1,538 area I quickly flipped my short-side exposure back to the long side. It simply wasn’t to be quite yet, and as traders we either adapt or die.
While all the signs from a cross asset perspective were there for stocks to head lower at that time, markets being markets decided to push higher and ultimately gave us a better top on May 22, the day of Fed Chairman Ben Bernanke’s testimony in front of Congress’ Joint Economic Committee.
To illustrate the divergence between stocks and most other asset classes please note the chart below, on which I drew stocks (green), commodities (red) and U.S. Treasury bonds (blue). While both bonds and commodities topped in 2012 and developed a series of lower highs in early 2013, stocks, ever the fearless animal, continued to push higher. As I often point out, gravity applies to the stock market as much as it does in nature, which is why a mean-reversion move was just a matter of time.
Fast forward to present day, and after last week’s FOMC statement stocks finally got going on a more meaningful mean-reversion move lower. By now everyone should have noticed the pattern in play, which is that major directional changes have over recent years almost always come after the central bank spoke. Of course, this is a sign of the times: Markets propped up on drugs have to follow their dealers.
The technical picture of the S&P 500 has, thanks to the 4.8% sell-off (on a daily closing basis) from last week’s highs to Monday’s close, significantly deteriorated for the medium term. As of Monday’s close, the index rests right near its 100-day simple moving average (blue) and the 38.2% Fibonacci retracement of the entire rally from November 2012 to May 22, 2013.
Most sectors, as well as the S&P 500 itself, closed well off their lows Monday, thus leaving long tails on their daily candlesticks. From here I suspect a bounce back up to the 1,600-1,620-ish range is in the cards in the near term. However, I suspect it will be of the dead cat variety and lead stocks toward better support anywhere between 1,500 and 1,540.
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