• 306 days Will The ECB Continue To Hike Rates?
  • 306 days Forbes: Aramco Remains Largest Company In The Middle East
  • 308 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 708 days Could Crypto Overtake Traditional Investment?
  • 713 days Americans Still Quitting Jobs At Record Pace
  • 715 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 718 days Is The Dollar Too Strong?
  • 718 days Big Tech Disappoints Investors on Earnings Calls
  • 719 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 721 days China Is Quietly Trying To Distance Itself From Russia
  • 721 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 725 days Crypto Investors Won Big In 2021
  • 725 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 726 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 728 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 729 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 732 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 733 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 733 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 735 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

Technicals and Fundamentals Could Converge

The bearish outlook is well documented with extensive coverage of the problems in Europe and the "dawn of the next credit crisis". We understand and respect the bearish case. We also understand and respect the seriousness of the debt problems in Europe. However, since the market's longer-term stance remains positive, it is also reasonable to assume the problems of the day may not yet derail the bull market. During corrections, it is nearly impossible to conceive stocks will ever go up again, much less have any chance of rallying to new highs. With all the bearish views, below we present a contrarian scenario that could lead to a better than expected rally in stocks:

  • The general backdrop of the markets points to a rally (oversold, high degree of pessimism, numerous people betting on declines with shorts, heavy capitulation-type selling on strong volume, positive divergences, calls for a "new bear market").

  • The market's health prior to the current correction was excellent, which says higher highs (above 1,220 on the S&P 500) have a realistic chance of occurring despite seeming almost impossible from where we sit now. Higher highs may not happen, but they cannot be ruled out based on the facts presently in hand.

  • Any positive economic news from any corner of the globe could propel markets higher. Oversold and pessimistic markets tend to react very favorably to anything that can even remotely exceed low expectations.

  • Gains tend to feed off themselves; if the S&P 500 can make a few intermediate higher highs in the next few weeks, momentum could surface rapidly since most of the sellers sold out in recent weeks. With greatly diminished selling pressure in the short-run, even a relatively small group of buyers can take control of prices and drive them higher.

  • The Euro is significantly oversold and has significant positive divergences that point to a possible rally. The news stories in the coming days and weeks may read something like this: The problems in Europe are serious, but the selling has been overdone. Budgetary problems have been pushed out into the future giving countries some breathing room in the short-term. The Euro may be in trouble in the longer-term, but it is not going anywhere in the short-to-intermediate term.

  • The U.S. Dollar is overbought and has some negative divergences on its chart; although they are not as pronounced as the divergences on the chart of the Euro.

  • If the Euro rallies and the Dollar at least stops rising like a rocket (or declines for a time), risk assets in general could benefit (stocks, commodities, and commodity-dependent currencies).

  • Finally, the Fed could say the economy is doing a little better, but conditions still warrant interest rates remaining low for "an extended period". That statement alone could give commodities and emerging market stocks a much needed boost. The Fed is smart enough to know the financial markets cannot withstand any comments related to raising rates. Our bet is the Fed is on hold at least until 2011.


Bullish Outcomes Probable - Bearish Outcomes Possible

Is it possible that none of the above occur in the coming weeks and months? ANSWER: Absolutely, positively yes - none of it may happen. Stocks could make lower lows and a correction could go on for a few months. Worse yet, stocks could shift into a full blown bear market in the coming weeks and months. This exercise is meant to counterbalance all the negativity that has ruled the mind of the market in recent weeks. Just when we think nothing good can happen and stocks go nowhere but down, they often surprise on the upside. The best thing we can do is to continue to pay attention with an open mind about bullish and bearish outcomes. The evidence, while significantly weakened in recent weeks, continues to support the bulls for the time being. Until that condition changes, we will continue to give the bull market the benefit of the doubt. Having the S&P 500 trade over 1,220 seems nearly impossible right now, which makes it more probable than we think.

Additional comments can be found in Short Takes.

 

Back to homepage

Leave a comment

Leave a comment