It's unusual that I feel this confident about the market's future. Doesn't mean I can't be wrong (long time readers know I'm quite capable of being wrong sometimes; and according to my wife, I'm wrong exactly 100% of the time, so she'd probably fade me) -- but I'd say I'm roughly 75% certain that the market has another leg down in its not-too-distant future.
I'm going to start off with the Philadelphia Bank Index (BKX), which I watch closely since it has performed as a leading indicator of the broad market for the past several years. On September 23, I wrote:
The Philadelphia Bank Index (BKX) continues to look weak, and may be the canary in the coal mine here. Long-time readers know I believe that trouble for BKX equates to trouble for the broad market, and BKX still looks like it wants new lows.
BXK has since made new lows -- and the decline there doesn't look finished. Based on the mid-term historical evidence, I simply don't believe any rally in the S&P 500 (SPX) can grow legs if the banks aren't participating.
Further adding to my confidence is the fact that the decline from the all-time-high in the S&P 500 (SPX) appears to have been an impulse. This suggests at least one more leg down of equal or greater length.
This has been a market that's difficult to get too far in front of, but I continue to feel that a larger intermediate decline is pending. The chart below shows my first target zone only, but I suspect we're headed into the 1500's at the minimum before it's all said and done. I'll reassess that thesis if and when the blue box target is reached.
In conclusion, I feel fairly confident that the decline from the all-time-high was impulsive, and I thus expect the market has at least one more leg down still to come. Further, I suspect this is actually the early stages of a larger decline. Nevertheless, once another leg down forms to allow the potential of a complete ABC (assuming I'm not dead wrong, of course), I'll reassess that intermediate outlook. Trade safe.
With the approaching fiscal cliff, a market decline is probably a very safe bet. But as soon as the debt ceiling is resolved by raising the debt ceiling higher, the markets will rally once again. We've all seen this movie before.
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