Market note: June 6, 2010
As of last week, the market decline has exceeded the typical 6-8 week pullback that can be seen in bull markets. In this note we will make some observations and suggest that the market behavior warrants caution.
S&P500 Weekly Jun 2, 2010 (courtesy of stockcharts.com)
The weakness (see chart) in the cap weighted S&P 500 index of the large US companies is shared with other indices. Both the Rydex S&P Equal Weighted ETF (RSP) and the NYSE composite index ($NYA) which is more broad than the S&P 500 confirm this weakness. The weakness also carries over in the breadth illustrated by the cumulative advance-decline index. Since this down move started, decliners have outpaced advancers on a cumulative basis by a margin comparable with some 2008 bear market declines.
NY advance - decline index (courtesy of stockcharts.com)
Canadian shares were not immune from the weakness. The S&P TSX index of the largest Canadian companies also pulled back in sympathy with the US market.
- courtesy of stockcharts.com
While this decline has aspects that are similar to the last bear market, there are important differences. For example, there are sectors that continue to show reasonable strength is this weak environment. This suggests that the market pullback is not driven by panic liquidation as seen in the summer of 2008. One such area, for instance, is high yield equities such as REITs and income trusts. There are also company specific fundamentals that also cause the corresponding share price to diverge from the market. An example of this is Biovail which is in the process of a corporate transaction with Valeant pharmaceuticals.
XRE and XTR compared to the TSX index (courtesy of stockcharts.com)
One source of additional information is Monday’s episode of Berman’s Call featuring respected analyst and strategist Larry Berman. The market enviroment is discussed in much more color and it is one way for the reader to gain more perspective.
Given the timing of this decline (May-July) and looking forward towards the later part of the summer and the September – October weak seasonality period, caution is key. There are many words that can be used to describe this market, one of which is dangerous. There has been sufficient weakness to suggest sellers are in control. However, sellers are selective in what they sell and buyers continue to accumulate shares they like.
Disclaimer: Please note that it is important to do further research and consult a licenced investment professional prior to investing in any security. Disclosure:The author of this article, maplenotes.com or staff do not own positions in the shares mentioned at the time this note was first published.