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Bear Watching – It’s Getting Ugly Out There

The stock market ended a strong quarter on a weak note, sliding for much of the last two weeks. The headwinds are holding back all manners of investment lately, including growth darlings like tech giant Apple (NASDAQ:AAPL) that briefly crested the $700 mark, as well as defensive investments like utilities and consumer staples.

So is this just a pause on the way to more gains and a strong end to 2012? Or is this a sign that the bears are sharpening their claws?

I’m convinced it’s the latter.

Sure, U.S. stocks closed out Q3 with impressive overall results: The Dow was up more than 4%, the S&P 500 gained almost 6% and the Nasdaq rose over 6%. Year-to-date, the gains are even more impressive: The Dow is up 10%, the S&P 500 is up 15% and the Nasdaq has surged 20% as of the opening bell.

But uncertainty has persisted the entire time, and signs of weakness continue to emerge.

I recently shared a bunch of them in my column outlining 11 reasons the rally is doomed, but here are some more to keep ringing the bear market alarm bell:

Sentiment: Bearish sentiment rose to its highest level since July 26, 2012, in the latest AAII Sentiment Survey. Sure, sentiment has been a problem all year, so this alone isn’t a big deal … and in late July the market was about to take off, so the bears were wrong. But it’s worth noting all the same.

Technicals: Cullen Roche at Pragmatic Capitalism takes a good look at the S&P 500 technicals, noting that while there is no sign of a crash just yet, it is clear there also is no clear affirmation of the new highs. InvestorPlace technical guru Sam Collins also warns that while new highs were made, we are very much in a phase of testing support. In short, the best-case scenario is a mild drawback … and worst-case is plunging through that support.

Where’s QE3? As put succinctly by The Fly on iBankCoin.com, “We’re not trading healthy and the important QE3 sectors are getting hit the hardest.” Does that mean that quantitative easing was already baked in to the market’s rally and that the Fed simply affirmed this move recently? If so … then what can propel stocks next?

Iran: Did you see Netanyahu and his cartoon bomb? Yeah, this isn’t going to end well. Many political and economic experts are increasingly expecting war with Iran in the next year. How do you feel about $150 oil again? Not bad if you own a Big Oil play like Exxon Mobil (NYSE:XOM) maybe … but not good for energy prices or consumer confidence.

Commodities: Everyone should be hip to the China slowdown, but it’s crucial to note this isn’t just affecting Chinese equities. Consider that as the massive commodity demand from the People’s Republic cools, pricing gets much worse for everyone in the world. Look at coal and steel for two hard examples. Weak commodity prices aren’t bad for consumers, but they ruin the bottom line for materials stocks like aluminum giant Alcoa (NYSE:AA), coal stocks like Peabody (NYSE:BTU), steel companies like U.S. Steel (NYSE:X), copper stocks like Southern Copper (NYSE:SCCO) … you get the idea.

More Alphabet Soup Indicators: Yes, GDP is still growing … but at a measly 1.3% annual rate. Also, PMI is lurching into the negative and looking really ugly (chart courtesy of Slope of Hope). It seems that each passing week there are just more ugly stats to point to.

For the record, I am not a permabear. I am one of those fools who is almost always “fully invested” in the market personally, since I am an egomaniac who is convinced I can find ways to profit in any environment. (Don’t ask me how I did in 2008 or 2009, please.)

Big picture, I expect a recovery to clearly take shape in 2013, and I will continue to stick it out with my long positions as a result. However, I think it’s doubtful that the markets will have much more momentum in the short-term despite hopes for a seasonal bounce at the end of the year.

That means I’m watching and waiting, not buying, and that short-term traders should get ready for a spooky October.

Further Reading

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via@JeffReevesIP. As of this writing, he was long AA and AAPL.

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