The market is at a crux, figuring out whether to rise or fall. There is a strong sense that the global recession will get worse before we begin to see...
The market is at a crux,
figuring out whether to rise or fall. There is a strong sense that the global recession will get worse before we begin to see positive things happen. As I have been saying, investor sentiment remains extremely bearish and does not suggest a sustainable rally. The proposed $41.1-billion takeover of Schering-Plough Corporation (NYSE/SGP) by Merck & Co., Inc. (NYSE/MRK) announced on Monday also failed to generate any market enthusiasm.
Investors are looking for a reason to buy and, so far in 2009, it has yet to materialize. President Obama's economic stimulus plan will eventually work its way through the economy, but it may not be enough to get things going. I believe that additional funds will be required down the road.
The market needs leadership to have any chance of advancing. The banking sector needs to be fixed to give investors some confidence in America's financial structure. There are some signs of improvement. Troubled Citigroup Inc. (NYSE/C) appears to have had an operating profit in the first two months of 2009, according to a leaked memo from CEO Vikram Pandit. At the same time, he also warned that uncertainties could alter the results in March. The banking sector rallied on the news, which indicates how something positive can drive buyers back.
Nevertheless, you must be careful, as the market risk remains extremely high. Investment guru Warren Buffett said that the U.S. economy has fallen off a cliff and that the unemployment rate will continue to rise. Based on the last several weeks, there is little optimism out there, as stocks cannot seem to get any upward momentum despite what is clearly an oversold market. Stocks have gyrated between positive and negative on lingering uncertainties. The concern regarding a lengthy and deep recession will pressure buyers and, in the absence of positive news, the negative bias will hold.
The near-term technical picture continues to be bearish with weak relative strength. Investor sentiment continues to be extremely bearish and this will hinder the sustainability of any upside move in stocks. At this point, about 6.25% of all U.S. stocks are above the 200-day moving average, down from 9.22% a week earlier and 14.10% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving averages trending higher.
With the stock markets so rocky and vulnerable to downside moves in the absence of a firm base, we advise you tread carefully and refrain from taking significant risk. A base has yet to be established, as major indices have moved lower. The market hates uncertainty and wants to see some downside support before entering. Watch to see if this can materialize over the next few weeks.
The bottom line is that I believe a prudent approach would be to stay on the sidelines and look for opportunities. Taking unnecessary risk can hurt your capital base and prevent you from buying when markets do turn. Keep an eye on buying opportunities to acquire stocks. A key strategy is to enter into smaller positions so that, if you are wrong, the loss would not be damaging to your trading base. If the tide turns, make sure you are not tied emotionally to the stock and instead sell it. And try not to chase stocks lower, as, in this market, it could be a costly lesson.
Profit Confidential
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