Outlook for the rest of the month (Sept. 13, 2015)

As shown on the chart below, the Dow’s rally off the August 24 low looks more like a corrective rally than the start of a new uptrend:

Dow Corrective Rally

Notice the choppy movement and overlapping waves. and the repeated failures around 16,600.

Also, the Fed will meet on Wed-Thurs. this week to decide whether to raise the Federal Funds Interest Rate. If they raise the rate, stocks will probably fall sharply to a new low on fears that the rate hike will slow the economy down.

If the Fed delays the rate hike, stocks will probably rally for a day or two, but afterwards the realization will hit that the rate hike was delayed because the economy is slowing down, so stocks will subsequently decline to a new low.

Thus, I think the outcome of the Fed meeting is a kind of lose-lose situation for the short term. The only way the Fed meeting could cause¬†stocks to break out to the upside is if the Fed delays the rate hike but affirms that the economic recovery¬†remains solid. But I think that, in recent months, the Fed has ruled out such an option (and that’s a good thing for the long run in my opinion).

Bears Everywhere

Right now, I think that bearish sentiment among market commentators is at its highest level since 2010. Almost nobody is confidently saying that the correction is over. The more bullish analysts are either ambiguous in their forecasts or calling for a retest of the lows. And the number of commentators calling a bear market is the highest I remember since the summer of 2010, when the European Sovereign Debt Crisis broke out, the U.S. recovery slowed down, and the U.S. stock market had a ~17% correction, including the “flash crash.” Many analysts concluded that the 2009 rally was simply a bear market rally that had reached its end.

Right now, I still think the U.S. stock market indices will break below their August lows, but not by a large margin. As long as the U.S. economy does not go into recession, the bearish camp seems crowded enough to indicate a bottom soon. Although U.S. economic growth does appear to be slowing down, the August jobs report suggests that the economy is not in recession. The alternative U-6 unemployment rate (which includes discouraged workers who left the work force and part-time workers looking for full-time work) continued its slow but steady downtrend that has been underway since 2010. In the two most recent recessions (2007-09 and 2001), the U6 rate ticked up before the economy started contracting.

I am interested to know what you think about market sentiment now. Is it really as negative as I think, or have I just seen the bears by chance?