Are the markets in a short term correction or are we headed for a bigger down move? - the Mesh Report

Are the markets in a short term correction or are we headed for a bigger down move?

the Mesh Report Staff May 19, 2011 0
Since hitting 1,370 a couple of weeks ago May 2nd, the S&P 500 has dropped about 3%. This retracement has caught many by surprise as most investors have been predicting slow and steady growth for the remainder or 2011.

The question now is, is this dip in the markets a buying opportunity or is this start of a bigger and more significant down move?

The bulls argue that retracements like the one the markets are experiencing should be expected, even in a bull market. Markets rarely move up or down in a straight line and this dip in the markets shouldn’t be over diagnosed. In the past 8 months, the S&P 500 experienced a 4.4% dip in November, a 7% dip in February and March, and a 2.6% dip in March. However, after each of these dips the market recovered and continued to push higher.

Bulls also point to the positive earnings results as well. 69% of the companies in the S&P 500 have posted a better-than-expected earnings from the first quarter of 2011.

Bears are singing a different story though. The first thing they point to is the sovereign debt crisis that’s plaguing Greece and the rest of Europe. Greece doesn’t have enough money to pay its debt obligations and the EU and IMF will either have to give them a second bailout or they will have to restructure. This situation diminishes the confidence in the global economy.

The end of QE2 next month in June is also a reason bears think this market will continue to fall. For the past couple of years the stock markets have been fueled by government stimulus and many people question whether or not companies will be able to function as well when/if the stimulus ends.

The attitudes of those investors running institutional money have also changed. The results, contained in the latest Bank of America Merrill Lynch Fund Manager Survey, show less confidence among institutional investors in corporate profits. The survey found just 41 percent of managers believing the global economy will expand, while 31 percent see a pullback and the remaining 28 percent either unsure or seeing little growth. That’s a huge drop from earlier this year.

Let’s also not forget that the US fiscal issues are playing a negative role in global markets. The US has reached its debt ceiling and has about 11 weeks for the Congress to figure out what it wants to do about the debt ceiling before they begin to default on their debt obligations. If that were ever to happen, the markets would surely take a significant nosedive.

Who is right? The bulls or bears? It’s not easy to predict.

In the near term my attention is on Greece. That geopolitical situation isn’t an easy one to predict. If Greece restructures or defaults, the dollar will most likely rally significantly. Lately, we have been seeing an inverse correlation between the dollar and the markets. A cheap dollar while negative for most people, has been a positive for the markets.

Also, Keep an eye out for important technical levels on the S&P 500 that if broken could lead to continued selling pressure. These levels are 1,300, 1,280, and 1,250.

What do you think? Are the markets in a short term correction or is this the beginning of a bigger down move? Please leave your thoughts & comments below.

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