Nothing puts the fear of God into bulls like a good old fashioned (vicious) pullback. During the shortened trading week, US equities lost more than 5% during three consecutive trading days. The sheer magnitude and breadth of the pullback no doubt gave traders a quick reminder of market conditions a mere 12 months ago. Since bottoming in March of 2009, stock markets worldwide have got a one-way escalator and refused to get off. For instance, US equities are up a dazzling 70% since the trough. The escalator is mainly powered by a tidal wave of liquidity courtesy of central banks around the world. Since March the market has yet to have a pullback in excess of 10%, despite relatively two minor corrections in June and September. However, there are increasing signs that the escalator is about to power down and that bulls are in for a nasty awakening. Let’s walk through a quick list of reasons why the long-overdue correction may finally be at hand:
- A main support for the rally was increasing risk appetite evident in a falling USD. Uncle Buck has been on a tear recently against EUR
- Decent corporate earnings have already been MORE than priced in. Case in point, check out Goldman’s record earnings, only to see its stock aggressively sold off
- China – the much talked about global engine for growth – is now on a tightening cycle. The People’s Bank of China is concerned about the country’s economy from overheating and has aggressively clamped down on credit expansion (much more effective than raising interest rates).
- Bullish investor sentiments are approaching levels last seen in 2007 – before the onset of the credit crisis
- Unemployment still getting worse with no speedy recovery in sight
- Team Obama-Volcker spells trouble for investment banks’ future profitability
- Uncle Ben’s reappointment is facing increasing uncertainty in Congress
From a technical analysis standpoint, pundits are talking about the major support for the S&P at 1078. In this view, the coming week will then be a do or die week for the US market. However in truth, these resistance and support lines are more of an art than science. Take it with a grain of salt and let’s see what happens.
