Investment Contrarians

Why Stocks Are on the Edge of an Abyss

By for Investment Contrarians |

Stocks Are on the Edge of an AbyssThe market is moving lower, and there’s nothing that appears to be supporting it. The S&P 500 has lost nearly eight percent since its peak of 1,465 in September.

The fact that the S&P 500 failed to hold above 1,400 was not a surprise, based on my technical analysis. In May, the break at 1,400 was the S&P 500’s fourth top above 1,400 since 2008.

Since the election, the market has edged lower in six of seven sessions due to heightened stock market risk.

On average, only about 37% of U.S.-listed stocks are trading above their respective 200-day moving averages (MAs), versus 61% a month ago. The short-term weakness is even more prevalent with about 19% of stocks above their respective 50-day MAs, versus 61% a month ago.

What happened to what were supposed to be the best six months of the year for investment gains?

Based on historical records, investing in the six months from November to May has produced the best returns for stocks versus the June to October period, according to the Stock Trader’s Almanac.

So far, November has been horrible, with the key stock indices down more than four percent. But as I said when I previously discussed this pattern, things could be different this time around, given the abundant stock market risk, including the financial crisis in the eurozone, a stalling economy in China, tension in the Middle East, and the presidential election and upcoming fiscal cliff in the U.S.

We are seeing some selling capitulation in the market because of the abundant stock market risk and lack of any positive news that would encourage investors to buy stocks. But there could be an oversold rally coming, which in my view could be an opportunity to take some profits or cut losses, given the stock market risk.

The reality is that the selling is broadly based, with the exception of some support in gold and silver; gold is also rising as a safe-haven play in response to the stock market risk.

The current group of stock market risk factors is what was already mentioned above, but now we also have the rising tensions in Gaza, along with the realization that corporate America is struggling.

We also have Black Friday and the key holiday shopping season starting this Friday, after investors take a break on Thursday for Thanksgiving to reflect on the market.

I’m sure there will be no thanks offered.

The reality is that there are numerous uncertainties and a lot of stock market risk out there, and you know how much the market dislikes unknowns.

Nothing will be easy, and I expect more hardships and stock market risk.

Until we see some resolution to the uncertainties I’ve listed, I honestly cannot see any sustained rally. We could see oversold buying, but that’s it, given the degree of the stock market risk.

The market will need leadership to have any chance of advancing upward. Two of the key drivers—technology stocks and bank stocks—are nowhere to be seen.

I doubt the S&P 500 will head that much higher this year and could likely struggle to hold on to its seven-percent advance. But that should not be a surprise, given the stock market risk and the failure to rectify the situation so far.

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