I have very deep concerns about the current market recovery and its ability to rally higher. The number of stocks trading above than their own 10 week Moving Average, on the New York Stock Exchange (NYSE) is almost 88%. That is the highest level since this data has been collected dating back to 1994 and indicates an extreme overbought condition.
Another interesting shift in the market is watching the market's direction into the close. For most of the last six weeks the markets rallied into the close sometimes to fend off the day's losses and on other days to propel the market to close even higher. But a shift is now emerging where the late day trades on six of the last seven days are to the downside - perhaps indicating that large institutions and program traders are selling off positions, not adding as they once were.The last three days the market has closed with its price virtually unchanged on consistently lower volume - that indicates churning.
The S&P 500 and the NASDAQ have been up five of the last six trading days and the DOW up six straight days - fairly long streaks without an even modest pullback. All of the major indices are on the high end of their trading ranges and a correction from these extreme overbought conditions are in order.
When reviewing the fundamentals that the media have been touting, one must question their sustainability. The "cash for clunkers" program may provide a short term boost to third quarter GDP numbers; however, it may also result in a dearth of buyers in the future as the clunkers program may have caused many of those who were potential buyers in the latter part of the year, to move up their purchase while they were still eligible under the expired financial assistance program. The existing home sales numbers while up from June to July 2009 does not tell the whole story. In most years, July is the top month for home sales. So to compare June to July in home sales is akin to comparing retail sales from November to December in any given year - when holiday shopping is peaking.
The other part of the report that was conveniently overlooked was the fact that the median prices of the existing homes sold in July were down over 15% from last year. That hardly sounds like a fundamental recovery.
One final point is that 30% of the homes sold were to first time home buyers who, like the cash for clunkers program, are getting an $8000 subsidy in the form of a tax credit from the federal government. That program too will end soon, and it will be insightful as to what affect that will have on future home sales and prices.
We can't overlook the fact that job losses are continuing and individual savings is increasing. Both of these factor into less consumer spending. Traditionally, it is the consumer who pulls the economy off the mat through increased spending.
I was in a high rise in downtown Long Beach today with a clear view of the Port of Long Beach and the Port of Los Angeles. I could only count four container ships total in the process of either loading or unloading its cargo. These ports combined, rank in the top five, as busiest ports in the world. I was shocked as I could see no other cargo ships around. Maybe you have never seen a busy shipping port before but I have been there many, many times over the years, and this was like looking at a ghost town compared to years past. Maybe it was just an anomaly today - but I doubt it. Japan and other countries are reporting exports down 31% year over year.
I feel we have moved to far too fast both fundamentally and technically and while I may be early, I doubt that I will be cited for being too cautious. If you're investing today, don't drink the Kool-Aid that the major media is serving. Seasonally, we are heading into the most difficult two months of the year (on average). Technically, we are at extremely high overbought conditions and the fundamental story does not add up. Less bad does not equal good. It just means less bad for now. The future has yet to reveal itself to us.
At some point, the market is going to ask to see more than just mixed data. It's going to want to see some real jobs produced and some validation that the economy is actually recovering and not getting just a little less worse than the bad numbers last month or not as bad as some analysts expected.