Friday, May 21, 2010

Technical Sell-off or The Bite of a Secular Bear?

This is quite the sell-off.

It’s been so sharp and materialized so quickly that it’s hard to build a consistent story around it.

Is this occurring because of the European contagion or because China is slowing (by dictate) or because the majority of the simulative efforts by the Feds are now complete leaving our economy to come off the juice and likely writhe for the remainder of 2010 or a mix of them all?

While it’s probably a little of all the above, the most significant driver of this sell-off may simply be the collective memory of the last calamity and possibly a general disbelief that government propping was a proper and lasting solution.

The run-up since March 2009 has been so exceptional, most “investors” likely suspect that there is a disconnect between the equity markets and the state of the government sponsored “real” economy and are taking no chances.

Still, as Carter Worth pointed out yesterday on CNBC, the S&P 500 breaking through the 200 day simple moving average is not unprecedented even in the midst of a longer up-trend.

Two significant examples are the 1998 sell-off and the 2004 sell-off (noted by Worth) highlighted on the chart.

While we could be in the midst of a third leg of unwind of the massive secular bear market that commenced in 2000, from a technical standpoint, this could just be a short term pullback with the ultimate day of reckoning still far into the future.

Still, this is just a simple technical comparison and obviously can’t account for the myriad of troubling issues facing the U.S. and world economies today.

The secular bear trend continues to be fully intact with one decade lost and another starting on a weak note and facing serious headwinds.