The major averages ended the week lower as they continue tracing out their 9-week downtrend (series of lower highs and lower lows) helping the bears remain in clear control of this market. It is important to note that the market is “oversold” and due for a bounce. Keep in mind that oversold markets can get a lot more oversold before they bounce. Friday marked Day 1 of a New Rally Attempt which means that the earliest a possible follow-through day could occur, to confirm this rally attempt, will be Wednesday, providing that Friday’s lows are not breached. If the lows are taken out, then odds favor lower, not higher prices, will follow and the day count will be reset. The path of least resistance is down until the major averages confirm their latest rally attempt. The pullback has now officially turned into a correction evidenced by the fact that several major averages are now more than 10% below their recent highs. So far, the reaction to earnings has been outright awful which suggests investors are not happy with the results or the implications for the future. To be clear, we expect a solution to the fiscal cliff and most likely stocks will rally on that news. If they don’t, that will be extremely bearish. Once that rally occurs we can analyze the rally but shall remain patient to see if a new uptrend emerges or if the stubborn two month downtrend continues.

Monday-Wednesday’s Action- Weakness Begets Weakness

On Monday, stocks opened higher but quickly turned negative as investors continued to wait for Washington D.C. to resolve the looming fiscal cliff. News from overseas was mixed to slightly better than expected. Japan said its economy contracted by -0.9% in Q3  which sparked concern that the Japanese economy will join Europe and fall into a recession in the near future. Meanwhile, China said its trade surplus topped estimates in October which was a welcomed sign. Concerns from Europe eased a bit after Greece approved its 2013 budget which was the next step for the debt-laden country to receive the next round of bailout funds. The big headline in the US occurred after Jefferies Group (JEF) agreed to be acquired by Leucadia National (LUK) for $3.7 billion. Leucadia National is a smaller version of Warren Buffett’s Berkshire Hathaway Inc (BRKA) and nicknamed “Baby Berkshire.”

Market Outlook- Downtrend:

From our perspective, the market is in a clear downtrend and has now entered correction territory as the major averages continue to fall. On October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19.  Since then, stocks have gone straight down and a lot of technical damage has occurred. We will turn more bullish once the major averages confirm a new rally attempt and then trade back above their respective down trendlines and 50 DMA lines.  As always, keep your losses small and never argue with the tape. 

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