Do the Fundamentals Support the Technicals?

The daily charts are painting a dire picture for the U.S. equity markets. Several prominent technical analysts are going as far as drawing dramatic correlations between the current market action and the patterns that preceded the Great Depression. Even the great bear himself, Robert Prechter with his Elliott Wave theory, has sounded the major crash alarm once again. While these proclamations can often be taken with a grain of salt, as mere hyperbole to increase media exposure, the question remains, are there solid fundamental reasons to expect a prolonged and damaging bear market? Let’s take a closer look at several key economic drivers to find an answer to this question.

The continued negative reports from the employment front are considered bearish. However, one must ask, compared to what? The unemployment rate hit the lowest level since July 2009, and the Non Farm payroll estimates dropped -125k due to census workers wrapping up their duties. Growth is slowing, but it’s still happening, simply at a lower rate than economists have forecast.

U.S. companies, as a whole, have turned in stellar earnings so far in 2010. Strong earnings are a reason to be bullish, not bearish, when choosing trading strategies. Most analysts are calling for a continued upward swing in corporate earnings this quarter. If this occurs, it is a strong indication that the technical picture is out of step with reality.

The last but far from least prime mover is consumer sentiment. Mortgage rates hitting all-time lows and oil prices plummeting should lead to an uptick in this critical indicator.

Based partially on the above factors, I would answer the question posed in this post with a resounding NO. While further declines may occur, the market is technically painting a far worse picture than the fundamentals indicate. Regardless, traders need to maintain a disciplined trading strategy and be ready for whatever happens next, as the future is unwritten.

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