In This Market, Adapt or Perish
The market action on Monday was downright brutal. We had just enjoyed the best week of the year and there was promising news of a Spanish bank bailout but after the gap up in the morning it was steady selling all day. Buyers had absolutely no interest and there was no underlying support.
The big question is whether this is a resumption of the downtrend that began May 1 that will eventually lead to a retest of the lows we hit about a week ago. As I discussed last week, the biggest and sharpest rallies tend to occur during downtrends because market players are not well positioned. They rush to cover shorts and chase long positions that can result in some big gains for the indices. That is exactly what occurred last week and, in retrospect, it was exactly the sort of move that shouldn't have been trusted.
The big danger created by these countertrend bounces is that they suck in a new crop of buyers at exactly the wrong time and then they are trapped when we have a day like yesterday. What makes downtrends so painful is that hope is crushed and the buyers just want to escape the pain and misery of the poor market action.
Unfortunately, there isn't a good reason to trust the market. Technically, it needs to find some support, and you have to consider the chances that it will test the 200-day simple moving average of the S&P 500 around 1289 or the recent lows around 1282.
The poor technical condition is clearly a reflection of the difficult macroeconomic environment. The Spanish bank bailout simply increased concerns over the extent of the problems in Europe as Italy moved to the forefront of the crisis.
It has often been said that the market hates uncertainty, and that is exactly what we have in Europe as everyone awaits the Greek election Sunday. If a party not in support of austerity is elected, we will have to wrestle with the consequences of the entire European Union falling apart in slow motion. No one knows how this will play out and that is going to keep money parked on the sidelines.