November 19, 2012 at 01:48 AM EST
Will Key Stock Indices Hold Their Ground?

The stock market rally that began in 2009 is witnessing its demise. Looking forward, there is more bad news than there is good news for the key stock indices in the U.S. economy. Reality is kicking in for the markets.

Fundamentally speaking, key stock indices are becoming weak at a quicker pace than some may have anticipated. Companies that are constituents of these key stock indices are struggling to keep their earnings growth. Firms across different industries in the U.S. economy are showing concerns about current economic conditions and warning investors about possible hurdles along the way. This is something I have been warning since the summer stock market rally kicked into high gear—earnings growth, the most important factor of a stock market rally, simply isn’t there.

Similarly, looking from a technical analysis point of view, the key stock indices are gaining momentum towards the downside—and it is happening quickly. Since the beginning of September, key stock indices in the U.S. economy have been generally trending lower. They gave up significant amounts of gains that were produced during the stock market rally in the summer of this year. Since mid-September, the Dow Jones Industrial Average has fallen 6.4%, the S&P 500 has declined 6.6%, and the NASDAQ Composite Index decreased 9.4%

In recent development, key stock indices, like the Dow Jones Industrial Average and the NASDAQ Composite, have broken below their 200-day moving averages (MAs). Looking at the charts below, they make me a bigger advocate of key stock indices falling.

Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

Nasdaq Composite Chart

Chart courtesy of www.StockCharts.com

When a stock or index falls below its 200-day MA, it is considered to be an indicator of bearish sentiment pouring into the markets. It can also be looked at as the “health index” of the market—if the price breaks below, it means that sellers dominate the market, and vice versa.

The stock market rally that started in 2009 was driven by printing money—and a market can only advance so much on monetary expansion alone. Dear reader, capital preservation is looking to be the best investment strategy right now. Key stock indices are entering very dangerous areas.

Where the Market Stands; Where It’s Headed:

As I have illustrated above, major stock market indices are falling quickly. Will 2012 be a break-even year for stocks? We’ll soon find out. But for 2013, I’m saying all bets are off. We’re in for trouble.

What He Said:

“Over the past few weeks I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy, and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in Profit Confidential, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”

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