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Why the Market Could Shed All Its 2012 Gains

By Jeff Clark
Thursday, March 8, 2012

It's déjà vu all over again.
 
If you've been watching the stock market and thinking you've seen this before, it's because you have. The action so far this year is almost identical to what happened last year...
 
The S&P 500 gained 100 points in the first six weeks of 2011. It was a straight move up. The market shook off technical warning signs and concerns over European debt and just kept powering higher. The natural ebb and flow of stock prices disappeared. It was a one-way road to higher prices.
 
That is, until the rug got pulled out from underneath.
 
Stocks are playing the same game here in 2012, including Tuesday's 20-point rug pull. If history continues to repeat, investors are headed for trouble over the next few weeks.
 
Take a look at this chart of the S&P 500...
 
S&P 500 large cap index 2011-2012
 
Last year, stocks broke down from a bearish rising-wedge pattern, bounced back up to retest the former support line of the wedge, and then nose-dived lower – giving up all the gains of the year.
 
We have an identical situation right now. At its high last week, the S&P 500 was up 100 points for 2012. Stocks have ignored numerous technical warning signs and increased concerns over European debt. The natural ebb and flow disappeared and stocks trudged higher nearly every day – until Tuesday, when the rug got pulled out from underneath the market...
 
The S&P 500 has now broken the bearish rising-wedge pattern to the downside. From here, stocks should bounce and retest the former support line of the wedge. Then, if the script remains the same as last year, things could get ugly and the S&P 500 could soon be right back down to where it started the year...
 
That's the bad news. The good news is last year's springtime decline set the stage for a rally to even higher prices into early summer. We could see the same thing happen this year as well.
 
Over the next few days, aggressive traders can use any bounce up near 1,365 on the S&P 500 to add to your short positions. Longer-term investors should wait for the next shoe to drop before buying stocks.
 
Best regards and good trading,
 
Jeff Clark
 




Further Reading:

"Just about every indicator I follow is waving the 'caution flag,'" Jeff writes. "Stocks are in trouble." Read his arguments for a pullback here, here, and here.
 
Stocks are up 25% since October... And it's hard to find bargains in the stock market these days. But Jeff sees one trade with a 4-to-1 risk-to-reward ratio right now. He calls it one of the best-looking trades in the market.

In The Daily Crux
Market Notes
Recent IPO Pandora plunges 25% in one day... quarterly results offer no sign that the company will become profitable soon.
 
Copper is in a steady uptrend since last year's selloff... up 10% so far in 2012.
 
"Clean energy" fund PBW is down 50% over the past year... the "normal" energy sector (XLE) is basically flat during that time.
 
Discount retailers are in a slow and steady uptrend... Dollar General and Costco are up about 15% over the past six months.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1352.63 +0.7% +3.2%
Oil (USO) 40.61 +1.2% -4.2%
Gold (GLD) 163.63 +0.6% +17.1%
Silver (SLV) 32.41 +1.3% -8.0%
U.S. Dollar 79.69 -0.2% +4.3%
Euro 1.32 +0.3% -5.9%
Volatility (^VIX) 19.07 -8.5% -7.7%
Gold Stocks (^HUI) 502.87 +0.1% -11.5%
10-Year Yield 1.97 +1.6% -43.7%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 135.69 +0.7% +5.4%
S. Africa (EZA) 68.37 +2.2% +1.8%
S. Korea (EWY) 58.38 +1.3% +0.4%
Singapore (EWS) 12.44 +0.7% -1.8%
Lat.America (ILF) 47.32 +0.7% -6.4%
Taiwan (EWT) 13.31 +1.5% -6.6%
Japan (EWJ) 9.87 +0.6% -10.2%
China (FXI) 37.92 +0.5% -10.4%
Canada (EWC) 27.99 +0.3% -14.8%
Israel (ISL) 13.04 -0.1% -14.8%
India (IFN) 22.34 +1.5% -22.9%
Russia (TRF) 16.89 -0.7% -30.7%

Sector ETFs
Symbol Price
Change
52-Wk
Retail (PMR) 24.83 +1.5% +27.5%
Big Pharma (PPH) 73.61 +0.6% +14.1%
Utilities (XLU) 34.92 +0.1% +13.3%
Big Tech (QQQQ) 64.06 +0.8% +13.1%
Consumer Svcs (IYC) 78.04 +0.9% +13.0%
Health Care (IYH) 74.51 +0.4% +10.8%
Real Estate (IYR) 60.37 +0.4% +7.4%
Biotech (PBE) 21.74 +0.7% +4.0%
Industrials (IYJ) 69.03 +1.0% +1.4%
Transportation (IYT) 90.66 +0.6% +1.4%
Defense (PPA) 19.56 +0.7% +0.5%
Telecom (IYZ) 22.06 +0.9% -0.1%
Software (PSJ) 26.00 +1.4% -0.6%
Construction (PKB) 13.29 +2.0% -1.9%
Media (PBS) 14.54 +0.7% -2.3%
Insurance (PIC) 15.88 +0.9% -3.4%
Internet (HHH) 70.21 +0.1% -3.8%
Water (PHO) 18.38 +1.1% -4.3%
Financials (IYF) 54.70 +1.2% -5.8%
Basic Mat (IYM) 68.57 +0.6% -10.2%
Oil Service (OIH) 121.00 +2.4% -11.4%
Semis (PSI) 15.05 +1.8% -14.4%
Nanotech (PXN) 6.32 +1.4% -35.7%
Alt. Energy (PBW) 5.39 +0.4% -46.7%

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