Top Gun FP Client Note: The Bull Market Is Over – But S&P Downgrade Should Mark An Intermediate Bottom

Last Thursday and Friday, the S&P plunged through year to date support at 1250 on enormous volume.  NYSE Composite Volume was 7.5 billion shares on Thursday and 8.6 billion shares on Friday.  Those are the two highest volume days of the year and about twice the year’s average volume.  The investment herd bailed out of stocks en masse and that kind of selling suggests to me that the bull market is over.

 

The news for the week was actually positive.  Congress got a debt deal passed and the July Jobs Report was better than expected.  But relief rallies at the open on Monday and Friday were quickly sold.

 

As if last week’s market action wasn’t bad enough, on Friday night S&P downgraded the US’s debt from AAA to AA+.  The investment world has been talking of nothing else all weekend as everybody tries to handicap the open Monday morning.  As I write (10pm PST), Asian stock markets are in the middle of their trading days with markets in Australia, China, Hong Kong, India, Japan and Taiwan down between 2% and 5%.  US Futures are signalling a nasty open with Dow Futures 300 and S&P Futures 30 points below Friday’s close, respectively.

Despite what looks to me like the end of the bull market, we may be setting up for an intermediate low on Monday.  Consider that almost a quarter of the entire gain for the bull market since March 2009 has been wiped out as of Friday close – 170 of about 700 S&P points.  Incredibly, the S&P has dropped 146 points (10.8%) in just the last two weeks.  On Friday March 6, 2009, 827 of 3194 NYSE stocks closed at 52-week low.  This last Friday, 828 of 3101 NYSE stocks closed at 52-week lows.

 

Combined with an extremely oversold market, governments are starting to react providing potential catalysts for a reversal.  The European Central Bank signalled to markets that it will buy Spanish and Italian government bonds.  The Fed is meeting on Tuesday and they could whisper sweet nothings to the market should things deteriorate in the interim.  If there is one thing we all should have learned in the last few years, it is that governments will not sit idly by while the market crashes.  And when they inevitably come to the rescue, the investment herd will panic buy the same way they panic sold the last few days.