More Market Weakness in Big Stocks

Stories on the markets, in general, usually unfold very slowly and in plain sight. Before all the great crashes there was ample warning from the technical trader. I wrote recently about signs that we might be seeing the 6 year rally running out of steam. The worrying thing with that is that the companies who are leading that weakness are failing in a very benign climate.

I’ve criticised the low interest rate environment since it started. It’s a perversion of market forces and the law of unintended consequences will prevail under such circumstances. What, in essence, is underpinning the flimsy fake economic boom we have now, in market terms, is a recalibration based on an increase in the money supply, and a lack of alternatives outside property (i.e. rubbish returns on savings at the bank). We don’t have a market rally so much as market inflation, which simply means we’re paying more for the same as before.

In a more macro-economic sense we are all subsidising companies and individuals that should have been taken out by a proper recession. You can’t have a spring without a winter, and holding the full-blown recession off is just making things worse. We are all watching our savings underperform, being punished for being responsible (i.e. saving, investing in pensions, etc.). Meanwhile, the benefit is going to support poorly run, unhealthy businesses that are harbouring the entrepreneurs that would have been freed up to create the start-ups that would have fuelled proper economic growth. At an individual level we’re subsidising people who should have been repossessed, and probably shouldn’t have been lent to in the first place.

Rolls Royce (RR.) have issued another profit warning, the fourth in 18 months, and this is where the emotional side of trading is exposed for the imposter it really is. I like Rolls Royce! Of course, we all do, most likely. But that has no influence over its fortunes or its share price, and that’s why emotional stock purchases will be rewarded by not being rewarded. Don’t confuse emotion with instinct, and remember instinct should only be used to exit positions, not to open them.

What an awful looking chart post profit warning (Feb ’14). Who is still in RR. apart from pension funds, forced to stay invested by the straight jacket of regulation? We’re at a 50% retracement of the rally and you can see it’s making a second attempt on that level. Fundamentals: blah blah blah profit warnings.

GSK (GSK) are also starting to look shaky. GSK hasn’t really performed too well over the last 6 years, and this support level it keeps testing above £13 is not going to hold up forever. A sucker rally in the stock would almost nail its fate. Lower highs since last April and now 4 touches on that support level. It’s not an attractive proposition. The question is whether to short into strength, which is the hardcore strategy. GSK is well underperforming its sector too. The Pharmaceuticals sector has been a star of the bull market and there’s a little ambiguity but perhaps even still some upside – generally a good looking chart! So what’s the story behind GSK, not that I take too much stock in so-called news that companies have any control over: blah blah blah China. There we are. If the Pharma sector fails at this juncture then it’s probably GSK that’s causing that.