US stocks bouncing around the break-even level after Friday’s dramatic session, with consumer discretionaries leading the gains after Hasboro’s (HAS) better-than-expected 4Q report.
With stocks flirting between positive and negative territory, it’s worth debating how long this recent correction will last. In particular, traders are keeping an eye on the S&P 500, which was down more than 9% from its late-January high through its intraday low on Friday, when a sharp late-day rally kicked in as buyers made early bets that a traditional 10% correction was nearly complete.
Based on its closing level, the S&P came into Monday’s action off 7.3%. But technicians are still on guard against a so-called “re-test” of the recent lows to complete the 10% pullback, which would take the broad index to 1035.
Also keep in mind the index tested and reversed off some key support levels on Friday, according to Kevin Lane, director of quantitative research at Fusion Analytics. “Weekly momentum indicators are losing momentum and are close to flashing some sell signals,” he says. But until near-term support is broken near 1026, “it is hard to get too negative.” Bottom line, “the trend is up and remains intact and only a move below the 1026 level would be viewed as a negative,” Lane adds.
How much stock one puts into technical reasons behind the recent pullback is certainly up for debate. But when determining what’s driving this recent selloff, don’t blame the declines on any one particular piece of news, notes John Hussman, president of Hussman Investment Trust.
“Once market conditions become as overstretched and complacent as they have become in recent weeks, a thousand events can act as triggers for abrupt weakness,” he notes.
But a second wave of credit losses is still his main concern, even though it isn’t getting much attention in the analyst community.
“We continue to expect those credit risks to become more salient as we move through the first quarter,” Hussman says. “Credit spreads widened again last week, and we’re keeping a keen eye on those, as well as indications of delinquencies and foreclosures, which may become a renewed source of concern.”
And the problems abroad can’t be discounted either. Issues in Europe are spreading further than Greece as worries concerning government debt and public sector liabilities have spread to Spain as well as Portugal, and Ireland and Italy could be next, says former IMF chief economist Simon Johnson.
“Europe risks another global depression,” he bluntly states on his blog. “Another Lehman/AIG-type situation lurks somewhere on the European continent, and again our purported G7 (or even G20) leaders are slow to see the risk. And this time, given that they already used almost all their fiscal bullets, it will be considerably more difficult for governments to respond effectively when they do wake up.”
S&P 500 up 3 at 1069.
(Peter A. McKay contributed to this post.)