Nasty selloffs today in markets around the globe on reports of escalating violence and the apparently heinous use of chemical weapons in Syria on civilians have shaken the market’s resolve. The famous line of scripture evoked above from “Proverbs 16:18-20” is profoundly translated in my copy of The New English Bible (Oxford University Press, 1976): “Pride comes before disaster and arrogance before a fall. Better sit humbly with those in need than divide the spoil with the proud. The shrewd man of business will succeed well, but the happy man is he who trusts in the Lord.”
The sentiment of this biblical passage is clearly applicable to the players and situation in Syria, the greater Middle East area and other geopolitical hotspots, but it relates even more so to the market than other translations. Business is mentioned directly and most of you would agree that there has been – and usually is – a rather high degree of arrogance about the health and continuation of this bull market. This bull is by no means over. While it may not end anytime soon, the likelihood of further downside action has increased.
We have been cautious and defensive in our market outlook, analysis and trading advice since April. The Dow is now only about 200 points or 1.5% above our April 1, 2013 Best Six Months Seasonal MACD Sell Signal and down about 5.5% from the August 2 all-time high and down about 4% from the May highs. Perhaps selling in May was not such a horrible idea this year.
In any event our outlook remains cautious. While some bounce back is likely between now and mid-September due to a combination of some rather oversold short term conditions and a usual bullish bias in the early part of September, downside risk has increased. Early this month we pointed out the looming presence of a potential Three Peaks and a Domed House Top pattern, which indicates a pullback to DJIA 13,000. On the technical front, the A/D line continues to deteriorate along with other indications. The 200-day moving average at 14,400 is at least the first line in the sand.
Economic readings and corporate results have been uninspiring. Add to that the volatile September/October period, the imminent reduction in quantitative easing and the inflamed geopolitical arena, not to mention the market’s propensity to decline between the upcoming Rosh Hashanah and Yom Kippur Holidays next week, and you have a recipe for further market weakness. Our advice to you is to sit tight, enjoy the rest of the summer and wait for the better buying opportunity over the next few months.