Are the Bears Coming Out of Hibernation Already?

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The last five days of bearish influence over the IPowerShares QQQ Trust (NASDAQ: QQQ) brings to mind that old investor’s colloquium: “Sell in May and Go Away.” The markets sure seem to be on par with that seasonal thought. Now as an investor, I need to ask myself: Is this the beginning of a bearish cycle in the market?

Does Oversold Stocks mean Bearish Market?

One important observation we can make from oversold and over bought statistics is how the market reacts when it is these positions. It appears that we have the highest number of ‘oversold’ stocks since October. I have attached the chart to let one see the difference. There is another observation I would like to make as we look at this chart.

<img src="/media/images/user_12871/aa_2_large.jpg" />

When the chart has shown that over bought stocks influenced the market, the market would rise. When over sold, the market would regress. If one compares the daily movement of the QQQ one can see that the market went up when it was over bought. When it was oversold, it went down. This oversold indicator is a fairly accurate sign of a possible turn down in the market again. Therefore this 5 day dip might not just be a short term movement, but the beginning of something bigger.

Inflation Fears Ahead?

Petroleum prices are climbing and we are also seeing an increased cost in our imports. U.S. import prices climbed by 1.3% from the month before, It was the largest monthly gain since April 2011. This increase may also lead to a short term increase in inflation.

When inflation goes up, interest rates may also do the same. In the wake of both (inflation and interest rates) being high, a creditor will have a tendency to compensate for the rise in interest rates. Therefore, the debtor has to avail of a loan at a higher rate. This plays a significant role in prohibiting funds from being invested in stock markets. Thus, there is a good chance markets could go down with the inflationary cycle. 

Global Worries

  • Government bond worries in Spain and Italy resurfaced as a lack of interest in the bonds make investors leery of the ability to pay them back.
  • Continued protest in Greece with the bond weakness opens the door to European debt worries again.
  • China has been reporting a slow down in the economic climate as imports grew less than expected.
  • In the U.S. earnings this quarter are not expected to be glamorous at all. Expectations are very low for this quarter’s earnings reports.

Is the PowerShares QQQ at the beginning of a prolonged bearish influence? There certainly are enough signs pointing in that direction that we as investors should keep a sober watch on the direction of this market. 

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