Market Update: Stocks Stumble To Support

The financial market took a bit of a beating on Tuesday as it is becoming more apparent that the current government shutdown is going to drag on longer than anticipated.  From the Republican’s perspective it is in their best interest to combine the debt ceiling, and the continuing resolution to fund the government, into one debate. No matter what the outcome of the negotiations both sides are likely to disappoint their constituents so it is better to only disappoint them once rather than twice in short succession.

However, the uncertainty, and the continuing threats of default, have finally taken their toll on the financial markets with the markets falling to critical support.  The chart below is a daily chart of the S&P 500 index with the red dashed line showing the bullish trend to date.

It is critically important that the markets defend this support or it is likely that a deeper correction will follow.  Such a correction would conceivably take the markets to 1625 which would be 2-standard deviations below the intermediate term moving average. 

Our sell signal, that was issued in early August, remains intact and we continue to carry a heavier weight in cash and fixed income currently.   As shown by the top part of the chart the market is starting to get to short oversold levels which will likely provide a short term bounce in the coming days.

If the markets rally but fail to set a new high it will suggest a continuation of the topping process that is currently in progress.  As we showed in last weekend’s missive entitled "Government Shuts Down:"

"The chart below shows a longer term weekly view of the S&P 500 with the same diverging momentum [as seen at the peak of the markets in 2007.] With the sell signal still firmly in place, and the market remaining overbought in the intermediate term, there is a good bit of downward pressure on stocks at the moment."

"That downward pressure is being mostly offset by the lift from the Federal Reserve’s ongoing artificial inflations. Therefore, unless, or until when, the market breaks down through important support or changes its current trend from bullish to bearish, we will want to maintain some equity exposure to the overall markets."

Should the markets break the current bullish trend line we could well be witnessing the development of a bigger correction in the works as we saw in 2011.  Such a break would warrant reducing equity exposure further, on rallies to resistance, in the coming days ahead.