The Beginning of the End?

"Now this is not the end.  It is not even the beginning of the end.  But it is, perhaps, the end of the beginning." - Winston Churchill

I have to say that Churchill is one of my all time favorite people to quote.  He certainly had a way with words that inspired a generation.  The words come from a speech at the Lord Mayor's Day luncheon in November 1942 when Britain was in the grips of the struggle to keep Germany off its shores and, at the time, it was looking pretty bleak for the British.  In contrast to what was going on in 1942 the week in review is not even remotely as dismal although the market's were certainly roiled by the Argentina default and the weak outlook for United States economy in general.  Not that this news (other than maybe Argentina) should be surprising to those of you who read this blog, but the question remains whether this down week marks a top in the market and a return to a bear market or just a blimp on the radar screen.

I have reviewed all of my economic data points and reviewed all of my charts and I have to say that the markets are looking particularly weak.  The S&P 500, the Dow Jones and the NASDAQ all broke down through their 40 day moving averages and seem destined to test their 200 day moving averages about 10% below where they closed today.  Fundamentally the US Dollar gained more strength as investors flocked to the safe haven (after being rattled by the Argentina mess) and this will weaken exports which has largely fueled U.S. economic growth. 

On the debt side there was a sharp correction in the high yield bond world.  This market was already at historic highs as investors desperate for yield pushed the yield on risky investments to historic lows.  This bet was bound to result in pain and the high yield ETF plunged 5%.  The recipient of this selling fueled buying in United States treasuries which saw the yield on the 10-Year Note fall to 2.52%. A continued sell off in this market is likely although until the market is completely spooked and investors lose confidence in the economy as a whole I doubt that we will see a panicked sell off just yet.

So while the numbers across the board were weak I am not sure that this weakness will spread into universal panic.  A lot of my indicators are showing a high over sold level so I would expect some form of a bounce next week.  Furthermore the selling was not panicked and in fact the markets staged a minor recovery in the middle of the day.  This type of recovery buying is indicative of buyers not leaving the market so I would not be surprised to see a bounce early next week.

On the flip I would not say that this is a buying opportunity as the market is finally showing its true colors.  The Federal Reserve support is weakening with every $10 billion reduction in the level of quantitative easing and volumes in the market (which show buyer conviction) were low (until the past two days).  This is not a metric that you want to see - high volume on down days and low volume on up days as the tendency is for the dramatic market moves to be in the direction of the higher volume or in this case, down.

With weakening global fundamentals, the default out of Argentina and the loss of economic stimulus from the Federal Reserve the market is due for a correction.  Furthermore the market rally is extremely long in the tooth and we are in the part of the year where volumes are low leading to volatility and weakness.  For these reasons I would not try to time an entry to the market (in fact I would be a seller on any bounce) and would wait until the dust settles later in the year to pick a market direction, although as long time blog followers will know I would not be surprised to see a healthy correction sooner rather than later.