Rudyard Kipling’s epic Poem "If" begins with, “If you can keep your head when all about you are losing theirs and blaming it on you”. Those words can come in handy for those trying to deal with the increasingly whippy market. The pullback I have talked about in my last two pieces accelerated last week. We started last week with the S&P 500 at the 1199 level. I suggested we keep an eye on solid support of 1196/1195 and then the critical 1177 level for support. Tuesday saw a sharp selloff to start the day and the S&P went below the 1177 level intraday and closed just over 1178. The market held support and rallied for the rest of the week. The index started the week at 1199.21 and closed Friday at 1199.73. There was a lot of volatility last week, but we got virtually nowhere.
What caused all of the volatility? There were concerns that more restrictive policies in China would slow growth there. European sovereign debt concerns also surfaced again. Problems in Ireland hurt the markets early last week. As details for a loan package for Ireland came out that fear somewhat subsided. I am sure for the next few weeks this issue will continue to impact the markets as we all decide if and how this and other debt issues in Europe could influence things. Commodities were also volatile as the dollar continued its rally.
Last week I said that after the huge run we had in the market the technical picture was not as pristine as it was a few weeks ago. The 10 week run off the August low of 1039 to the November high of 1227 is similar to most of the rallies off the 2009 low. Rallies since the 2009 low have lasted between 9 and 10 weeks before pulling back or consolidating. The short term relative strength reading for the market at the recent high of 1227 was the highest it had been since January of 2004. Therefore, it is not surprising the market has run into tough sledding as we near the holiday season. Looking at a weekly chart of the S&P 500, the bulls still have the advantage. That advantage is not as decided as it has been but the bulls remain in charge. The index held above its 12 week (one quarter) moving average. Also, the weekly buy signal remains intact as the index closed above its 4 week and 12 week moving averages.
Continued strength in the dollar and uncertainty in Europe will continue to decrease confidence in the market. The action off the recent high remains orderly. Buyers have come in to support individual stocks and the market at key support levels. In my opinion the market will become far more selective and split as we go forward. Management teams that continue to deliver earnings in excess of expectations will see their stocks move higher. Companies that fail to deliver on guidance will be treated ruthlessly. The rising tide has seen all sectors work higher over recent months. I would be far more selective going forward. In this low growth environment earnings acceleration will be handsomely rewarded.
