3 REASONS WHY THE MARKETS ARE GOING NOWHERE FAST
While we may be coming up on an inflection point of short-term significance with respect to the markets, it is not a point where one will be justified to increase equity exposure exponentially. The legs of the market have been broken by a 300 pound thug with with a swing like Barry Bonds. It will take a considerable amount of time before the market has the wherewithal to stand on its feet, taking all comers.
There are a number of factors that signal the market is not yet prepared to put the recent bearish behavior behind it, for an intermediate to long-term run at the upside:
1. Bottom pickers: If picking bottoms only leads to smelly fingers, then all of Wall Street must stink, at present. There are far too many individual and institutional investors who have become perfectly content with not looking at the potential for downside, but rather focusing on when a bounce will occur and how large its potential. This type of mindset becomes problematic especially when the markets have suffered significant technical damage in important indices such as the COMPQ, NDX and SOX. In 18 years, I have not seen a single bottom of significance take place when a majority of the focus is on capitalizing on the bounce rather than protecting from further downside. Invariably, this mindset absolutely needs to reverse before the bottom everyone seems to be waiting for can take place.
2. Technical damage: There is far too much of it across major market averages. I have outlined how we were in the process of failing at important generational trajectory points over the past few weeks. The type of technical damage we have experienced resolves in one of two ways:
A. Panic to the downside resulting in high volume rinse. Capitulation, in other words.
B. A prolonged sideways range that slowly causes the entrenched bulls to give up their optimism.
I happen to think we will see a resolution with B over the next few months, rather than A.
3. Earnings shock: The earnings that have been reported during Q3, along with Q4 guidance are not going to support a prolonged rally until some of the variables start becoming less murky. Based on the caution expressed in nearly every conference call as of late, you can expect that October was a weak start to Q4. November will likely be just as weak until the uncertainty of what the elections mean for the United States and the world start becoming more apparent. It will likely be December before investors can accurately gauge whether the markets have become "investable" again based on available data. This sets the markets up for a best case scenario of choppy conditions in November.
I would be thrilled to report a different set of circumstances. However, this is the hand market participants are being dealt currently. Effective risk management will go a long ways towards making sure that once the turn comes, investors will be properly positioned to respond appropriately.
