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Stocks Stare Down Weak Data Again But Sell Signals Are Everywhere


Two weeks into the post-QE3 era and it looks like we've got ourselves a hung jury. What that split marketplace means is that, on the one hand we have the blank check blessings of Ben Bernanke and therefore ability to shrug off horrible economic data - like Q2 GDP growth of just 1.3% and durable goods orders diving the most in 3 years - while turning a blind eye to growing turmoil again in Spain and the European Union.

As much as stocks went into today's session having fallen 7 of the past 8 days, the cumulative 2% decline from the recent top has been been modest by most accounts -except where it isn't. That's because a few key sectors are already more than halfway to correction country (a 10% decline) while the balance of the market is simply just soft.

The problem, as my co-host Jeff Macke and I discuss in the attached video, is whether or not the 6 to 7% erosion seen in the Transports, Semis, Banks and crude oil over the past ten days will spread to other sectors and trigger a broader sell-off, or if this mini retreat will remain contained and serve as a buying opportunity for the next leg up.

I am inclined to believe the former, having taken into consideration a number of historic and current factors, least of which is the need for professionals to preserve what's left of the now 11% rally we've enjoyed since early June. Add in the reality that this is the last week of the month and quarter, as well as the repeated reminders we've heard from Stock Traders Almanac honcho Jeff Hirsch about the perils of late September, an 80% negative pre-announcement ratio of warnings for upcoming quarterly earnings, and a clear and pronounced shift to defensives, that has pushed Health Care, Consumer Staples, Telecom and Utilities to the fore, and I think the table is more than set for a broader sell-off.

And not the harsh, one-day event variety of history book fame, but rather the agonizing, drawn out slow bleeds that result in a 15-plus percent slump. Exactly the kind that we've seen in each of the past 3 years of this bull market that is now 42-months old.

The bull case, as argued by Macke, is currently one of waiting in cash (rather than "dead defensive" sectors) on the belief that a lot of badly lagging money managers have no choice but to chase the market in the final 90 days of the year, two-thirds of which comes after the upcoming election.