The stock market has come under pressure as of late even though the Expectations Indicator signaled low expectations on 6/12/2012. Although it may appear the bears have taken control of the stock market, the fact is the market is trading just as a low expectations market would.
When we look at the current activity, we need to evaluate what is causing the pressure and what brings relief. For example, last week the market traded down considerably with the anticipation of a large credit ratings agency lowering 15 banks credit ratings. Since the release was due after market trading hours the market closed nearly on its lows for the day. On following trading day the market popped on the news with a common sentiment the “it could have been worse”.
This sense of relief is a typical response to an environment where there are low expectations. No matter what the ratings changes where the low expectations market environment expected worse.
Today and in the coming days the stock market is anticipating more news that should have the similar effect of trading down on the anticipated event followed by a relief rally on the news. This behavior is very typical in the early stages of low expectations.
We should expect the market to transition from this “it could be worse” environment to a more optimistic one as expectations build.