Market Trend March 06, 2012

Has not be blogging since I was involved in a major project. Partly due to change of computer, the setting up was not quite ready.

It appears to me that the bulls are running a little bit tired. Some form of corrections should be in the cards. Maybe, it will not be major since there are still liquidity and Fed is always ready to intervene by injecting more money. Now that Greece issue is no longer a major concern, the market will be focusing on other issues. So far, economic data has been decent and it appears the economy is getting better though not that good. US presidential election coming, Fed is always ready to "help" the incumbent. That's how they protect their job?

The Wild Swing to Continue in the Stock Market Worldwide

With USA market leading, the wild swings in the prices and indices is expected to continue for a while. With this back drop, I am expecting at least one sovereign default to take place before extreme measures will be implemented to stabilize the market. And my guess is Greece will be the bogey boy since its impact to other nations is among the smallest of all. Spain, Italy are too large. France is even larger. USA default means world economy collapse. Essentially, USA is "Safe".

It seems that we may not avoid the double dip after all. But the dip will be short lived. There will be immerse effort to blow up the bubble. Another much bigger bubble will be sharped in place to cover the current bubble. This seems to be the direction of how the world economy is moving towards to. As individual, we can't go against it. We can only trade along it. Even a country like USA or China can't fight this trend. The whole world is addicted to credit and spending future money. The addiction is too deep to ditch. Nobody is able to take the pain of curing.

Is the market preparing for major descent?

As I review through the index components of STI, I noticed that most of the counters had been experiencing corrections of about 20% over the last 3-4 months. Most of them are now trading below the 200-period moving average. Comparing this scenario with end of 2007, I am trying to figure out whether there is any sign of break down.

In 2007, the run up to the crash was a super bull run from 2004 and punctuated by 2006 correction and 2007 correction. The last leg was extremely strong followed by rapid correction then crashes.

There are 3 pairs of patterns where prices move below 200-period moving average during bull run. I call them pattern 1, 2 and 3 (see picture). Pattern 1 was a false warning. It resulted in super bull run in 2006/2007. Pattern 2 was the real warning. It resulted in 2008 crash. The million dollar question is whether this pattern is real warning?

A check on each of the component stocks reveals that majority of them (about 25/30) are trading below 200-period moving average now. Some of the started the down trend 6 months ago while other 3 months ago. For those stocks that are still sitting on top of the 200-period moving average, they are on the down trend also. How long this down trend will persist is anyone's guess. If the current situation persists, this may result in a slow grind to the bottom.

In essence, the major trend of the market has actually turn negative and has persisted for more than 3 months. The major macroeconomic factor seem to support such trend. If the macroeconomic factors persists for another 3 months, the trend should be confirm and we should expect further down side.