Fast markets are emotional markets. In case you had any doubt on that, I would refer you to the comment section of Breakout stories from last Wednesday when bears ruled the roost, and the comments from yesterday when the dominant theme was the impossibility of "timing the market" (by, say, opining that stocks had hit a near-term bottom at 1,100).
As one who seeks to learn about all investing strategies, even the weird ones, I suggest a truce so that we may take a deep breath and take a fresh look at the market's fundamental and technical field position. The fundies are atypically rather easy: Corporate earnings are quite strong and the macro data is dropping off a cliff.
Now for the technicals.
To help us on the chart-front, Breakout called in Louise Yamada, Director of Louise Yamada Technical Research Advisors. I make no bones about my respect and admiration for Louise. I've followed her work for years and she's made me money. Is she always right? Of course not, nobody is. But she's far better than most and errs on the side of preserving capital rather than trading on hope. Good technicians aren't about catching tops or bottoms, they're about catching the "meat" of a move.
All that said, let's get her opinions:
U.S. Markets as a Whole: Louise says we are "finished with a cyclical bull and entering a cyclical bear." It's not the end of the world, just an end of the uptrend off the 2009 lows. Since January of this year, the market has seen falling volume on rallies. Simply put, longs are nervous and ever less inclined to buy the dips. As we saw when the S&P500 uptrend from 2009 broke definitively around the 1,300 level, followed by support failing at 1,250; nervous bulls sell in a hurry.
The Death Cross & Other Momentum "Tells": A Death Cross occurs when the 50-day moving average (MA) falls beneath the longer term, 200-day MA. This technical indicator is getting a lot of buzz of late, both because it has a very cool name and it's been a relatively reliable indicator of a failing market. The fact of the averages crossing is a function of market momentum failing. Obviously. The Death Cross occurs relatively seldom and can change quickly, Louise notes. A false cross occurred in 2010 but reversed within weeks. On the other hand, the cross in early 2008 was an outstanding exit cue. These are the two most recent Death Cross triggers.
While "one should pay attention" to the Death Cross, Louise is more concerned with the MACD, Stochastic, and ADX. These more subtle indicators of market momentum are all looking punk, adding to Louise's conviction that the cyclical bull is done. As is the case with all momentum-based technicals, Louise's favorite 3 tells don't tic the exact top, but rather suggest a pull-back will be more sustained than the normal ebb and flow of the tape.
Uptrends and Support: These blunt instruments of TA are the basis of the Purple Crayon system. They are the indicators most widely followed by the masses, meaning the maximum number of buyers create demand when uptrends and support are hit. In a bull market, the thick crayon lines hold, just as they did from the S&P bottom of '09 all the way to this summer. When "uptrends (are) sliced right through leading to 20% down moves" it's rather obvious the buyers have less conviction than fleeing bears.
Add it up and markets are showing ominous weakness, both on the macro economic front and the charts. To be clear, Louise isn't crying "short!", she's suggesting a position on the sidelines. "There are only two losses that you take," she sagely observes, "Loss of capital and loss of opportunity. I'd rather be out of the market wishing we were in, than in the market wishing we were out."
Go ahead and argue charts versus fundamentals versus buy and hold in the comment section below, but know that you'll never change my opinion of Louise and her work. Keep an open mind; dogma and good investing seldom mix.