Friday, June 10, 2011

The 6 Week Nap

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Imagine you have been asleep for six weeks and just woke up.  The stock market has declined five straight weeks, a rare occurrence, and is working on six today. 

The sovereign debt crisis in Europe is percolating again with Greece, Ireland and Spain teetering.  Last Friday's employment report, as you can see below, showed very few jobs being created in May with unemployment ticking slightly higher again.  As I have mentioned before, if this was a normal recovery, job growth would be soaring right about now.  Since mid 2010, we are more like hovering.

Bernanke & Company's QEII, which pumped $600B into the system will be ending in a few short weeks.  And the S&P Case Shiller Index of home prices just hit an eight year low.  Yes, you read that right.  Home prices, except the ones we are trying to buy, continue to make post crisis new lows and are back to levels not seen since 2002 and 2003.

You would be hard-pressed to "feel good" right now.  One would have thought that stocks would be down 10-20% with this horrible backdrop.  But they are not.  From high to low, the stock market has pulled back 6%, yet another 4-8% pullback that I keep discussing.

If you add in the somewhat extreme nature of the selling wave along with the surge in investors buying protective put options and newsletter writers more bearish than bullish for five consecutive weeks, you have all the makings for at least a short-term low.  I am going to stick my neck out and say that the bottom is not in place yet and will likely need one more selling wave to hammer in. 

My theme for a while has been that there should be at least one more stock market rally left IF there is a big correction coming in Q3.  I still believe that.  All the makings are there.  Failure to rally in the coming weeks would usher in some not so pleasant memories of bear markets passed, which would mean sharply lower prices very soon.  But we can cross that bridge if and when it happens.
FYI, I will be on CNBC’s Squawk Box at 6:10am on June 13.
Feel free to email me with any questions or comments at
Until next time…
Paul Schatz
Heritage Capital LLC
Follow us on Facebook at and on Twitter @Paul_Schatz

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