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General Electric (GE) may have sealed the top for the market's latest bear rally. On Friday, GE generated its largest one-day drop in two decades as the market was sideswiped by a rare earnings miss and sour forward-looking guidance. Suddenly, all those confident smiles wearing "I've seen the bottom" lipstick are melting into eyes of worry. After all, if GE can drop this kind of stink bomb, how likely is it that we have already seen the worst of the recession and how appropriate is it to start pricing in a recovery just 3 or 4 months into it?
On a related sidenote, I have to say that I have become quite weary of all the pundits trying to outguess our current economic malaise. One of the classic examples came from Brian Belski, chief U.S. sector strategist at the Merrill Lynch Investment Strategy Group, as he provided the CNBC audience his recession analysis last week. He looked back over the last 6 recessions and found that the market bottomed about 60% of the way through the recession and that the average recession lasted 11 months. He proceeds to give some very confusing investing guidance based upon this timeline and analysis. Kudos to Mark Haines for asking why Belski assumes we are experiencing an average recession; he challenges Belski with claims this will be the worst recession since the Great Depression. Belski is then forced to admit that Merrill's chief economist (David Rosenberg) has ascertained that this recession will last "a lot longer" than the average. How much longer, we are not told. But I think you can smell the fish here. We get precious little information on why the last 6 recessions provide enough data for this kind of analysis. We get little idea how to relate the current malaise to these other 6 recessions. After Mark Haines pushed some more, Belski compares the current malaise to the 1973-1975 recession. That was a period of severe stagflation and no one is saying we are there (yet). Even so, that recession was surely not average! We are also not given any background on what happened when the market finally found its bottom during these six recessions. For example, I would think that Fed action would have a lot to do with the timing of the recession and market bottoms. And even more importantly, I would think that identifying the sector that leads the economy into recession would play a role. Overall, the best I could get from Belski is that no matter where we are in the recession cycle, I should buy right now consumer staples and healthcare (minus the poorly performing portions of healthcare, of course) because they are the most defensive names around. Strange recommendation because why bother with the timing analysis, right? Belski caps the interview by recommending "core franchise" technology names for the long-term growth investor. And, again, how does this link to the market-timing analysis? In other words, the long-term investor almost never worries about the business cycle. Recessions are times for buying on the cheap...
Anyway, two important things came out of GE's report. The most important thing is that the global infrastructure play remains robust. In fact, if it were not for the frenetic building going on around the globe, surely the U.S. would be in awful shape by now. Stay tuned to see whether the consumer comes back in time to enjoy all this gleaming new infrastructure. If not, we will see a capacity glut that will surely and easily overshadow the glut we experienced after the technology bubble burst earlier this decade. I will try to keep tabs on this dynamic over the coming months and years. The second important thing is that GE provided some clarity on the technical boundaries of the stock market. I would say that we received pretty decent confirmation that the bounce from the March lows will become just another bear rally and not the beginnings of some new bull market.
On April 2, I marked out the regions on the S&P 500 where I am bullish and where I am bearish. I reproduce that chart below:
The S&P 500 teased us by drifting into the bullish region, but is now taking a nosedive back toward the bearish region.
Now, why am I already declaring technical defeat before the S&P 500 officially returns to the bearish region? Well, it's because the NASDAQ has already entered its bearish region with new lows for April. This means, the NASDAQ is below the low of the great monster one-day rally on April 1st, and it is a breath away from turning April from a hopeful month full of promise to a negative month.
TraderMike always cautions us that technical signals are more shaky during earnings season: one news event can violate all readings in a flash. But, given the importance of GE, I am going to stick my neck out here. The carnage GE caused is of similar weight to the historic carnage that started off the year. Additionally, I cannot get bullish about the market's prospects until GE closes Friday's ugly gap down and begins moving higher from there. I am not saying I expect no more snapback rallies in the short-term. I do expect them, and I felt compelled to nibble a little on the selling in preparation for that possibility. But, overall, I think April's highs have now marked the highs for the bear rally from the March lows. I expect those lows will be violated in due time (remember, target of 1200 for the S&P 500), especially as pundits and the like stop calling for a robust economic recovery right after a recession has supposedly begun. Heck, can we at least get one positive jobs report first?
Finally, for those of you still looking for signs that March was the bottom, I give you the chart of the ETF for semiconductors. Led by the likes of Intel (INTC) and Applied Materials (AMAT), yet dragged by Texas Instruments (TXN), the SMH has been slowly but surely churning and trending higher from the January lows... Watch those INTC earnings this week!
Be careful out there...!