Investors are giving in to their fears this morning — worrying that the stress tests for the banks, even though they’ll probably be graded very cozily, might reveal bad news. Meanwhile, The Treasury may now convert the government’s existing loans to the nation’s 19 biggest banks — part of which came as preferred stock — into common stock. Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.
Why does this scare the market ? I believe it’s because the underlying truth is that Congress, as compliant as it is, may balk at a White House request for more money to bail out banks. The banks have behaved shamelessly and greedily, and the Treasury-led bank bailout has turned into wholesale looting of national wealth for the gain of a select few.
Bankers are scared by any sign that their government-funded gravy train may come to an end.
But it’s not just banks that are hurt. Commodities are getting creamed. Part of this is profit taking. London copper fell more than 1 percent on Monday as a stronger dollar triggered profit-taking from last week’s rally to a six-month high.
And oil is getting clobbered. It’s now testing that support at $47 that I told you about.
Why is oil getting whacked? Heck, I can’t figure out why it was up so much in the first place. I figured maybe insiders knew something. Maybe they don’t. Maybe it was all speculation.
Now, let’s look at the S&P 500. I’ve put it on a chart with the McClellan Oscillator, an indicator that Helene Meisler at RealMoney.com uses a lot.
I’ve put a version of this chart that you can follow on the web here: http://stockcharts.com/h-sc/ui?s=$SPX&p=D&b=5&g=0&id=p99736468092&a=165831454
The McClellan Oscillator works with market breadth. Breadth is defined as the balance between advancing issues (all stocks up at least a penny on the day) and declining issues (all stocks down by at least a penny). In a strong market, advancers will usually overwhelm decliners by a significant margin. The opposite is true when a market turns weak.
Traditionally, a reading of +100 on the Oscillator is interpreted to mean the market has become overbought. While a market can stay overbought for an extended period of time, traders should be alert to any signals of selling pressure. By contrast, the market is oversold when the oscillator reaches -100, and traders should be alert to a rally.
The current Oscillator reading shows we should be looking for a pullback. On the other hand, the S&P 500 could test support at 846 (probably today) or 831 and then head higher. The oscillator really works when we see a decisive break of a trend.
One last chart … the S&P 500 Bullish Percent Index
You can follow this one on the web at: http://stockcharts.com/h-sc/ui?s=$BPSPX&p=D&b=5&g=0&id=p96251970779&a=165828387
You can see that this bull rally is getting a little grizzled and ready for a pullback. I would say we should go short now, but for the past couple weeks, we’ve often seen stocks sell off in the morning only to come roaring back in the afternoon. Let’s see how this works out today.
Both bulls and bears should be careful out there.
Related Posts
- Congress Guts Pro-Investor Legislation (11/07/09)
- Bullish Dollar has Stocks and Commodities on the Run (06/15/09)
- A Surge of Bullish News for Commodities (07/15/09)
- Rough Transcript for “The Biggest Bargain in Commodities” Video (07/21/09)
- Yap! Yap! Yap! Let’s Talk Commodities (02/20/10)
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