Reassurance Could Be Weeks Away

Our prior instincts were correct. Late Tuesday we ran a column entitled “The Fed as Catalyst.” In it we mentioned that we had wanted to discuss stalling in the NASDAQ as a cautionary tale earlier that day but were forced to scrap that idea when the market broke to new highs in the pre-market.

But it turns out the caution was warranted. As we had suggested the Fed’s policy announcement on Wednesday was a catalyst for selling, as the market suddenly became worried about removal of liquidity from the financial system. The break above the highs was a fake out and the beginning of a correction.

After three days of selling that correction looks like it could last several weeks. All three days of the correction the market closed not far off its lows. You expect that early in a decline but after two down days Friday’s performance bodes poorly. The sellers had exhausted themselves as witnessed by sharply reduced volume that day. But buyers, who heretofore had stepped up on the slightest hint of selling, were nowhere in sight late on the third day of the pullback. In the final hour the markets sank into the weekend.

We’ve discussed liquidity concerns as the reason for the pullback. It was reinforced by a sudden drop in recently resurgent home sales and durable goods numbers that were flat, after the market had fully priced in a nascent recovery. Clearly the bloom has come off the growth rose and made traders anxious.

We expect market uncertainty to continue as we have now arrived at the doorstep of earnings warning season where the entire market is likely to be less eager to bid prices higher.

After three down days we should expect a bounce. But we would not be surprised if it were less than enthusiastic. If that is the case we would take full advantage of it to sell mature positions.

We believe earnings season will allay growth fears and revive the uptrend. But there are at least three weeks between then and now and there could well be volatility in the market that weak hands would rather not endure.