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Why rallies can’t be trusted

by Patti Domm

Tuesday’s fizzled stock market rally shows why there are still plenty of reasons to tread cautiously.

“The market is afraid. Frightened markets don’t go up,” said John Kosar, chief strategist at Asbury Research.

Kosar, in a note to subscribers, says some factors suggest it’s still too early to get back into the market on the long side. But he does see some favorable conditions for an intermediate-term bottom over the next several weeks.

One is the historically high put-to-call ratio, a contrarian indicator; the spike in the volatility index, or VIX, and a big flow of investor assets into the money markets. Asbury created a proprietary look at the velocity of money into money markets.

 

But the negatives outweigh right now, including outflows from big ETFs, like the S&P 500 SPDR and the PowerShares QQQ, as well as widening corporate bond spreads suggesting danger still lurks.

“I think there’s other significant issues out there other than oil, like break downs in key indexes here,” said Kosar.

“When you see trends that originated in ’09 which is really when this last move started — ’09 after the ’08 debacle. When you see those trends being broken and one, two, OK, you’re a little bit skeptical, but the power of this and the significance of this is it’s happening overseas,” Kosar said. The break from an uptrend could be signaling a steeper decline. The Dow transports and the Russell 2000 fell below their March 2009 uptrend lines last week, following the path of the Dow Industrials the week before.

He said a similar break in trend lines occurred in international indexes including Japan’s Nikkei 225, the Hong Kong Hang Seng and the U.K. FTSE 100.

“There’s indication of weakness that extends beyond oil. Certainly oil is part of that global deflation issue that people are talking about. All of the commodities prices are down. It speaks to global slowdown. Everyone is focusing on oil because it’s the shiny object, but there’s other things going on out there,” he said.

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