“We didn’t expect the U.S. would be this weak,”
–Senior Strategist at Goldman Sachs
The Dow Jones Industrial Average plummeted 7.5% in the first 22 market days of the new year. Short term momentum oscillators got severely compressed, setting the stage for an oversold rally. The decline appears to have been an impulse wave, so odds are good that the primary direction has turned down and the rally will not make new highs.
To say the financial world got caught wrong footed is to grossly understate the case. As noted in my last several posts, there are no bears on Wall Street. This first drop has the suits vigorously defending themselves. “Since we do not see sufficient reason to change our fundamental earnings outlook and stock prices have fallen, the market still appears attractive to us,” said the Goldman Sachs strategist. Similar versions of this “analysis” can be found on the Web pages of all of the brokerage firms I’ve surveyed.
This is criminal. Wedded to their misguided stances, they will do their utmost to keep their clients in the market. The rally underway now supports their case, but if it fails to make new highs, they will be setting up their clients to suffer enormous losses over the next couple of years.
The first relief rally in a bear market sometimes retraces 90% or more of the drop. For various reasons, I doubt this will be so this time around. Here’s the daily chart of the Dow, and the retracement levels that I think may be possible prior to turning back down again:
The sentiment in the stock market is rarely so one-sidedly bullish. I’m always amazed when this happens because it never fails to be wrong. This time might be different, but I wouldn’t bet on it.
No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.