U.S. stocks had their worst trading day since the current rally began in March. Typically, this type of trading action signifies at least short term change of character for the market. The fact that this was the widest trading range in a month, and that the Dow and S&P 500 made one week lows just one trading day removed from making a new high for this rally suggests that the rally is probably over for now. Watch for a little more selling, then a possible re-test of the highs. If we see another day like today before we see an upside day like today, or before it makes new highs for the move, then you will know for sure that we are heading lower.
The driver of today's action was weakness in the financials, which have rallied dramatically. Bank of America indicated that earnings were better than expected, but that losses on the credit card side of the business will likely worsen in coming months.
There have also been reports that banks still are not lending, in spite of what they have been maintaining. At this point, it really makes no sense for them to lend money to anyone if their jobs are at risk. This looks like a vicious cycle to me. We need the banks to lend money so that businesses can get back on their feet, consumers start spending a little, and new homes can be built. But, on the flip side, we need stability in the job market to lessen the risk for the banks to make loans to individuals. With that in mind, maybe it IS indeed necessary for the government to grow and create new jobs in through government bureaucracies. Unfortunately, that kind of growth will result in higher taxes and interest rates down the road due to the debt being piled on.
Time will tell.
Scott Cole
www.theultimatestocktradingsystem.com
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