It's Too Soon To Buy The Dip!

After six straight down weeks the S&P 500 is down only 6% from its April peak.

That’s not near enough to factor all the negatives into stock prices. Those negatives include the rapidly slowing U.S. economy, sharply rising global inflation, plunging global markets as central banks raise interest rates to ward off inflation, the cuts in government spending yet to hit the U.S. economy as Washington and individual states tackle their record budget deficits, and the end of the Fed’s QE2 stimulus program.

Yet already Wall Street is assuring investors that the correction is over, and the lower prices are presenting a buying opportunity.

Be careful.

After six straight down weeks the market is short-term oversold and due for a brief rally off that oversold condition.

But it’s strictly a technical situation. The market doesn’t move in a straight line in either direction. In strong rallies it periodically becomes short-term overbought and pulls back some to alleviate that short-term overbought condition before the rally resumes to new highs. In market corrections it periodically becomes short-term oversold and rallies back up some to alleviate the short-term oversold condition before the correction resumes.

Meanwhile, although all financial firms have a staff of technical analysts keeping up with the market’s technical condition, Wall Street grabs onto simple non-technical explanations when making its attempts to keep investors buying.

So on Thursday, it explained the market’s positive day as being a response to the reports that new claims for unemployment fell by 16,000 in the previous week, and new home starts were up 3.5% in May, claiming those are signs the economic slowdown is bottoming.

They know that reasoning is ridiculous. Unemployment claims jump up and down week-to-week for a variety of reasons. Five weeks ago they declined a much larger 29,000 for the week to a total of 409,000. They’ve been up and down since, and this week they declined 16,000 to 414,000. But that’s more total claims for the week than there were in mid-May. And new home starts rose 3.5%, but that was after an 8.8% decline in April, leaving them lower than in March and still scraping along a depression-like 25-year low.

On Friday morning the market continued its technical rally off the short-term oversold condition. Wall Street said it was in response to French President Sarkozy’s remarks that the EU will probably consent to a new bailout package for Greece. A market strategist on a TV financial show said, “This is the catalyst a lot of people were looking for to jump back into the market.”

Huh? That Europe will kick the solution of the Greek debt crisis down the road again, with another temporary bailout payment, has no connection whatever to slowing global economies and rising inflation.

Meanwhile, Wall Street ignored the reports that were important this week.

The Housing Market Index, measuring the confidence of home-builders, plunged to just 13 this month (on a scale of 1 to 100), a nine-month low. Inflation at the consumer level (CPI) was up 0.2% in May, now up 3.6% over the last 12 months, more than double what it was a year ago. The NY State Mfg Index, and the Fed’s Philadelphia Mfg Index, both plunged again this month, this time into negative territory. The Philadelphia Index, often a precursor of the national reports, plunged to -7.7 from +3.9 in May, +18.5 in April, and +43.4 in March. It was the largest three-month collapse in the history of the report.

Meanwhile, as global central banks raise interest rates and tighten monetary policies to fight the rising inflation, slowing their economic growth, their stock markets have been in serious corrections. And historically, global markets, including the U.S., move pretty much in tandem with each other in both directions.

The world’s 10 largest economies behind the U.S. are China, Japan, Germany, France, the United Kingdom, Brazil, Italy, Canada, India, and Russia. As a result of their concerns about their slowing economies and rising inflation, their stock markets are down an average of 12%, with most hitting new lows every few days, no bottom in sight.

And Wall Street is telling us the correction in the U.S. market is already over with a decline of just 6%, and U.S. economic reports still coming in more negative each month, and with more roadblocks to recovery still ahead?

Buy the dip?

I suggest continuing to sell into any short-term strength that develops, and taking positions in ‘inverse’ ETF’s and ‘inverse’ mutual funds, which are designed to move opposite to the market and thus make gains in market corrections.

In the interest of full disclosure my technical indicators triggered an intermediate-term sell signal on the market on May 8, and I and my subscribers have had profitable positions since in two ‘inverse’ ETFs, the ProShares Short Russell 2000, symbol RWM, and the ProShares Short S&P 500, symbol SH. And it is my intention to add to my downside positions in selected ‘inverse’ funds in any short-term rally that develops.

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