Stock Market Sells Off But Is Due For A Rebound
The major stock market indexes posted their largest one-day drops in four months Friday asGeneral Electric 's ( GE ) andMicrosoft 's ( MSFT ) earnings misses renewed concerns about corporate profits. But notable analysts contend the market is on the verge of a rebound.
SPDR S&P 500 ( SPY ) plunged 1.79% to 143.17, just below its 50-day moving average.
PowerShares QQQ ( QQQ ), tracking the 100 largest nonfinancial stocks on the Nasdaq, dropped 2.6% to 65.56. It fell further below its 50-day line, which is bearish.
SPDR Dow Jones Industrial Average ( DIA ) skidded 1.8% to 132.98, also landing just below its 50-day line.
The panic in technology stocks, such as withGoogle (GOOG), the past week marked a turning point in the stock market, says Mark Arbeter, chief technical strategist at S&P Capital IQ.
"Panics during bull markets, while very scary, force the weak hands to sell, creating opportunity for those looking to increase equity exposure," he wrote in his weekly report.
The American Association of Individual Investor survey shows bullish sentiment has dropped to 28.7%, while bearish sentiment has jumped to 44.6%.
"This poll is now almost as bearish as it was in July, when the market was just emerging from the pullback earlier in the year," Arbeter noted. "These readings are especially noteworthy as the S&P 500 is only a couple of percent from its recent recovery high. From an intermediate- to longer-term perspective, we think these readings just don't jive with a major market top. The majority are bullish at tops and bearish at bottoms."
The consolidation in stocks has run its course, Credit Suisse wrote in a client note today.
"The market is no longer as overbought, with 72% of NYSE stocks now trading above their 10-week moving averages (a much more reasonable level), having been as a high as 84% by mid-September," Credit Suisse wrote.
Investor appetite for stocks remains low, while overall risk appetite for all asset classes have risen to average levels, which usually signals a rotation into cyclical investments, Credit Suisse added. And U.S. earnings guidance has improved. "This tends to lead earnings momentum," it said. "Q3 U.S. earnings growth is forecast to be negative for the first time since 2009 at -1.4%. But Q4 is forecast to pick up to 13.1% year over year."
The major indexes will bounce another 10% from current levels before rolling over early next year, said Harry Dent, founder of HS Dent, an economic research and forecasting firm in Tampa, Fla. The author of "The Great Crash Ahead" and editor of the "Boom & Bust newsletter" believes the Federal Reserve's third round of quantitative easing, or QE3, to boost the economy will run out of steam soon because baby boomers aren't spending as much money as they save for retirement.
"You can't stimulate the economy when the baby boomers are not spending anymore," Dent said. "We've been stimulating and stimulating. Each stimulus has less impact like a drug. It's not going to last past next year. Earnings are decelerating and that's going to hit the stock market."
In his most recent client report, Dent warned: "The smart money is not reacting to QE3 with bullishness, or lower put/call readings. That tells you the end is likely near as the dumb money continues to pile in on hope for the Fed to save an ever-failing economy."
Dent added: "Most investors assume that the economy and stocks can't fail as long as the Fed and central banks keep stimulating. Japan has proved that is not the case over the last two decades of its wildly gyrating stock markets and economy with endless QE policies.
"Artificial monetary injections into an economy ultimately will fail, but will be followed by further stimulus after a next recession sets in. Stimulus fails because it doesn't address the root problem of excessive debt and slower demographic spending trends and it takes more and more stimulus until its side effects, like growing stock bubbles and imbalances, reverse and the economy deleverages to a degree again.
"Such deleveraging allows space for more, ill-advised stimulus to work again until it fails in less time than the last. We forecast that the next deeper recession and stock crash will occur between very late 2012 to early 2013 and late 2014 to early 2015, followed by a global rally into 2017 or so, and a then less-severe final recession and crash in 2020-2022.
"Welcome to the roller coaster stock market of the 2010s propelled even more by the new 'denial-based' Keynesian economic policies."
IShares MSCI EAFE Index (EFA), tracking developed foreign markets, fell 1.5% to 54.02%. It's still trading above its 50-day average, which is bullish.
IShares MSCI Emerging Markets Index (EEM) slipped 1.80% to 41.41. It's also holding above its 50-day line.
Follow Trang Ho on Twitter @TrangHoETFs .