Fundamentally weak, technically broken….So what happens to a market that faces record high oil prices, a slowing economy, a slowing housing market, global monetary tightening policies and geopolitical tensions. If you knew about all of these factors, you would assume the market was weak, which in fact it is.
This time of year the markets are typically being driven by corporate earnings season, but instead the market faces so many other issues that it has the feeling that earnings season just doesn’t pack the punch this quarter. The S&P 500 earnings season began in full swing this week, but the record double digits earnings growth may not continue this quarter. As sometimes happens in a falling market, traders and speculators have “forced” bullish positions in the market trying to pick a bottom and ride the next rally. However, last week’s selloff poses the question on whether or not the market can push forward?
A few weeks ago we wrote that the market has made 4 small corrections (about 7%) since July 2004. We have not seen a 10% correction since the bull run started in 2003, yet we believe it is still looming, especially with the fundamental scenario weakening. The chart below is an updated chart from our last article; however, you can see that the trend channel was broken last week and we are approaching a 10% correction down to the 1190-1200 area. At this level we should find quite a bit of support before making another directional move. It could be perfect timing as the FOMC may decide to pause its interest rate hiking campaign in the next few months and the market may bottom out around the same time.
click on the chart to enlarge
The markets are trying to hold on as we face consequences not seen for quite some time. Consumers have as many worries on their minds as a schizophrenic in a quiet concert hall. I foresee quite a bit of volatility in the markets over the next few weeks unlike many other lackluster and dull summer months. As we have said in our monthly newsletters for quite some time, we believe that volatility (VIX) will return back to a more “normal” level in the mid to low 20s. May began the march as VIX spiked to the low 20s, but it had no staying power as it quickly fell back into the mid-teens before spiking again to 18 last Friday. Remember, VIX and the market typically move in the opposite direction of each other, and we think VIX still has some room to go to the upside, which is in line with the market moving down to the 1190-1200 range.
click on the chart to enlarge
The market faces a plethora of economic data this week including both the producer price index, the consumer price index and the FOMC minutes. This will drive the market in one direction or the other, but it should be interesting to gauge the difference between the investor in the market and the consumer which is driving the market. In our fund, we do not take an opinion on which direction the market will move next and this analysis does not necessarily reflect our trading strategy, but it is just an informational analysis of current market conditions. We will see if it pans out or not, but either way, we will take advantage of the opportunities the markets presents.
by Charlie Santaularia
Parrot Trading Partners, LLC
The managing director of Parrot Trading Partners, Jes Santaularia, was recently featured on CNN International as one of 13 worldwide entrepreneurs that have shown a knack for turning a passion or hobby into a high growth business. See the videos at http://www.parrottradingpartners.com/parrottradingnews