Two times this past week the Dow has declined tripled
digits. Is this the top the bears have been waiting for?
Friday 10/19's selloff was the largest decline since mid-June,
when the market was in the midst of a trend change and building a
Tuesday 10/22's selloff was even larger, with the Dow
Industrials (NYSEARCA:DIA) down over 200 points. Chemical and
material (NYSEARCA:XLB) companies, such as Dupont (
) and 3M (
), were the latest culprits in a quarter filled with lowered
guidance and missed earnings.
Are these two large declines a sign that a trend change is
occurring? Have stocks topped?
Speaking of Fundamentals
On 10/9 with the S&P 500 (NYSEARCA:SPY) near its yearly
highs I wrote an article on the cyclicality of earnings and margins
and why investors should be cautious of the market's lofty
The chart below accompanied that report and helps explain why
investors should be cautious with such lofty earnings
To summarize: earnings are cyclical, do not go up forever, and
invite competition when margins get too high.
Besides the more recent earnings misses, the Transports rang
that warning bell even earlier, when FedEx (
) and other Transports warned about 2012 and 2013 expectations.
Dow Theory, a popular technical analysis tool, has warned us for
over a year that the Transports (NYSEARCA:IYT) were not as healthy
as most assumed.
On 8/31 we published an article on the hints Dow Theory was
providing us. Those warnings are playing out now as the
Transports woes reverberate into other sectors. Also see our
Dow Theory YouTube video
Speaking of Technicals
In our recently publishedProfit Strategy Newsletter, on 9/21 and
again on 10/19, we identified the importance of 1430 and why
if it fails the top is likely in. "We will be waiting for
prices to drop back below the Fed low of 1430 to give us a signal
that the top is likely in". In the 10/19
Profit Strategy Newsletter
we alerted readers, "We are waiting for prices to maintain below
the Fed Support Zone @ 1430 to give us a signal an intermediate top
is likely in".
On Tuesday, 10/23, prices breached that level as well as 1420
leaving only one intermediate term support level remaining for
What we are Watching Now
Seasonally the markets are entering their strongest period of
the year. November and December typically spark the "Santa
Clause Rally" . Similarly, the uncertainty around the
presidential election also may trigger a rally into year end as
statistically the final seven months of a Presidential election
year have only finished negatively in 2 out of the last 15
elections. The bulls certainly have seasonality and
statistics on their side.
The rally since the June lows has been led by the Energy
(NYSERCA:XLE), Financial (NYSEARCA:XLF), and Technology
(NYSEARCA:XLK) sectors. On 8/17 and on 9/26 I showed how
these markets have been the leaders since the June lows and until
they start to become laggards - the market likely would not
top. They have led the market up ever since.
However, technology has already broken down and is leading the
market lower. We are now watching the financial and energy
sectors closely for their confirmed breakdowns and added weight
that a market top is likely occurring.
Profit Strategy Newsletter
includes a detailed analysis of various market forecasting tools,
along with a short, mid, and long-term outlook for the US stock
market and a target range for the ultimate bottom. Although
the market is only down 4% from its September highs and the bulls
have seasonality and statistics on their side, there are warning
signs that could turn this decline into something much
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