The North American markets are certainly no longer as youthful and vibrant as they were just two years ago. The sudden and violent nature of the latest decline was a reminder of that.
In mid-May the US indices reached their corrective objectives, what we called a “normal correction” level. However, the close proximity of major support levels and 200-day Moving Averages left little room for further downside action. In the following weeks the S&P 500 and the Dow Industrials were desperately groping for support near their 200-day Moving Averages and the Toronto market was trying to hang on to its last bastion of support. The situation became even more dramatic in the first days of June as US indices spent three trading days below their 200-day Moving Averages. These three days were enough to cause serious damage to the psyche of market participants, already bruised by the European debt scare. It didn’t take long before headlines such as “a bear market has begun” and “another crash around the corner” reappeared in the media.
Fear-induced selling pressure has pushed the market lower into extremely oversold conditions; for example, the percentage of S&P 500 stocks that were above their respective 10-week Moving Averages dipped below the 15% level by the 5th of June.(*)
As usual, the markets reacted to such extreme readings with a recovery rally. While the first lift was strong enough to put the indices back above their 200- day Moving Average, the initial up- move was met with: “How long will this last?”
Following a decline from the March highs, US indices, the S&P 500, Dow Industrials and Nasdaq have spent the last four weeks building small bases in the form of bullish “head-and- shoulders” formations. Recent breakouts from those areas of accumulation have put the indices on the path toward their March-April congestion areas, but once they got there, sellers once again got the upper hand.
It is the behaviour of the market in the face of this resistance zone that will be the prime determinant of the fate of this bull market.
(*) Data supplied by Investors Intelligence.