Wednesday, October 5, 2011

What the bulls have to do to take control

Stocks rallied hard yesterday in the last hour because of a story in the FT that EU ministers were looking closely are bank recapitalization plans. While the turnaround on a relatively high volume day has some analysts suggesting that yesterday might have been a key reversal day, I am still inclined to give the bears the benefit of the doubt, for now.

As they say, let's go to the game film. The SPX rallied yesterday to close above the key support level of 1120 as a test of the support failure experienced the previous day - which is encouraging for the bulls.

Watching for signposts of a trend reversal
Here is what I am watching for signs that the tide has turned and the bulls have wrestled command back of the stock market. First of all, the broader NYSE Composite Index remains weak and remains below the support breakdown. I would like to see the broader averages participate on the upside.

The banks melted up on the news of a possible EU plan to have a plan. A look at BKX shows that the banking sector remains in relative downtrend and has much work to do before an upside relative breakout can be called.

Recession concerns vs. banking solvency concerns
In my previous post entitled "Too many bullets for stocks to dodge", I wrote that the markets now have to deal with a second headwind of likely recessions, both in the US and in Europe. For stocks to turn around, I would like to see some alleviation of those concerns. A look at US cyclical stocks show that they remain in a relative downtrend.

The cyclically sensitive Dow Jones Transportation Average isn't performing well either.

Similarly, the chart of commodity prices looks positively sickening and commodities finished in the red yesterday despite the market rally in the final hour of trading.

What's the big picture?
Investors have to keep the big picture in mind. I recently wrote to keep the following principles in mind when confronted with European newsflow:
When analyzing Europe, it's important to remember these principles:
  • Greece is going to default. It's just a question of when and how.
  • The EU can't afford to bail out the peripheral countries. What makes you think that they can bail out their banking system?
One day does not make a turnaround. For the bulls to take control of the market, they have to demonstrate that banking and cyclical concerns have been alleviated. Until that happens, I continue to give the bears the benefit of the doubt.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Tiho said...

Like I said like week, you got to bearish and your views became consensus. There was no break of support, just a bear trap which caught a lot of short interest!

Sentiment got extremely negative from the near term point of view and bonds became amazingly overbought. So now you long equities and short bonds for awhile... say few weeks to couple of months!

Nothing goes down in a straight line remember?