Market Turbulence Ain’t Over

Barron’s

Notwithstanding Monday’s pop, veteran market watchers see potential for further downside on the charts.

It ain’t over ’til it’s over, Yogi Berra memorably commented when he was managing the New York Mets — yes, the Mets — to the National League pennant in 1973 in an improbable late-season comeback from last place. Of course, Yogi’s dictum can work both ways. The pall that has hung over the Mets since their epic collapses in 2007 and 2008 has followed them from their former home of Shea Stadium across the parking lot to their new digs at Citi Field. Its namesake hasn’t fared much better; Citi’s stock (ticker: C) traded around the split-adjusted price over $500 a share back then, nearly 20 times what it goes for now.

What also hasn’t run its course are the stomach-wrenching swings in the stock market. Down 4% one day, up 3% a few days later, it is a roller-coaster not for the faint-hearted. Since the early-August plunge in the wake of the debt-ceiling fiasco and the subsequent loss of America’s triple-A credit rating, stocks have attempted to mount a couple of rallies. But the market has remained bounded by 1120 on the low end of the Standard & Poor’s 500 and about 100 points higher at the top end of the range. And after all the gut-wrenching swings, you always get off a roller-coaster exactly where you got on.

Veteran technical analysts who have been on these rides contend it ain’t over. Following Monday’s big, 2.3% jump in the S&P 500 led by financial stocks, ISI’s John Mendelson warned the firm’s clients not to be fooled by bounce. « This appears to be another potential failed rally that will erase the negative emotion needed to create a market bottom, » he wrote in a short note early Tuesday. By the session’s close, a 2.8% advance had been slashed to just over 1%. Adds Walter J. Zimmerman of the United-ICAP technical advisory service: « Everything points to this rebound as a bear-market correction. Expect the next leg down will be a real debacle so we feel compelled to reiterate the downside risk. In fact, this presumed bear-market correction may already have peaked on Tuesday. »

And Richard Ross of Auerbarch Grayson pointedly concludes: « The torrid two-day advance in stocks and commodities has done little to change the primary technical structure of risky assets, and we remain steadfast in our belief that the ‘lows are not in.' » For the S&P 500, Ross sees the 1120-1220 trading range ultimately being breached to the downside, with a test of 1072 at a minimum with a target of 1008. That’s corroborated by what he calls « filthy action » in gold, silver, copper, crude oil and emerging markets. All these risk assets should be sold, Ross advises, and the dollar should be bought.

What would really keep Ross up at night (were he long) is the Euro Stoxx 50 chart. « A break below critical support at 2000 would be a disaster of global proportions, » he asserts.

That 2000 level was first attained in the « heady days » of 15 years ago, before the introduction of the euro currency. The same 2000 marks the lows reached in the 2008-09 crisis collapse and at the end of the tech-telecom debacle at the beginning of the century. There were spikes below the key 2000 level on the Euro Stoxx 50 in 2009 and 2003 as well as last week, but the previous violations were temporary and didn’t hold; indeed, they proved to be washouts that led to big bull moves.

If the European sovereign-debt situation and supposed solutions to it have been the swing factor in global markets, it wouldn’t be surprising that the Euro Stoxx 50’s ability to hold its key support level might have broader implications. What’s clear is the current market turbulence is far from over.

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