The benchmark S&P 500 (SPX) experienced another shallow pullback in both size (-5.3%) and scope (only 2 weeks) as the bulls defended three important areas of support (50 DMA line, 6-month upward trendline, & April’s high) last week. So far, every pullback this year continues to be very shallow in both size (% decline) and scope (# of days) which bodes well for the bulls. The SPX is in a new trading range between 1687 (resistance) and 1600 (support).
Monday-Wednesday’s Action: Stocks Fall Towards 50 DMA line
Stocks opened higher on Monday as investors digested a slew of economic data from across the globe. China’s HSBC’s Purchasing Manager’s Index (PMI) for May fell to 49.2, below the 50-mark that separates expansion from contraction. It was the first contraction in seven months and another in a series of weaker-than-expected economic data from the world’s second largest economy. European economic data was slightly better-than-expected. Eurozone manufacturing data declined but topped estimates which helped support the view that their economy is stabilizing. Separately, ECB chief Mario Draghi said the Eurozone is on track to recover later this year but said the economy remains “challenging.” In the US, Factory activity edged up in May but growth remains sluggish. The ISM’s Factory Index fell to 49 for the first time in six months and missed the Street’s estimates for 50.7. It is also below the boom/bust level of 50, signaling contraction. Construction spending in the US rose 0.4% to an annual rate of $861B in April which missed the Street’s estimate for a gain of 0.8%.
Stocks snapped their 20th consecutive Tuesday win streak as concern spread regarding global central banks’ ability to continue their easy money polices. Kansas City Fed President Esther George, reiterated her support to end QE sooner than initially expected because that will help financial markets reduce their dependence on QE. Separately, the U.S. trade deficit widened in April to $40.3 billion which missed the Street’s estimate for a gain of $41.0 billion.
Stocks were smacked on Wednesday as investors digested a slew of data, most of which was weak, from across the globe. Overnight, Australia’s GDP grew by 0.6% in Q1, missing the Street’s estimate for a gain of 0.8%. Japan’s Nikkei plunged again after Prime Minister Abe fired his much anticipated “Third Arrow” to stimulate his economy. Markit’s Eurozone Composite PMI, which measures business activity in the Eurozone, rose to 47.7 from 46.9 but remained below the boom/bust level of 50. In the US, ADP said US employers added 135k new jobs which missed the Street’s estimate of 165k. Factory orders rose 1% in April but unit labor costs slid -4.3% while productivity rose 0.5%. The ISM service index ticked higher in May to 53.7 from 53.1 in April. Finally, the Fed’s Beige Book said the economy experienced modest to moderate growth.
Thursday & Friday’s Action: Stocks Bounce Off Support
Thursday marked a pivotal day for the market as the bulls showed up and defended three important areas of support: 50 DMA line, 6-month upward trendline, & April’s high. Stocks bounced on Thursday as a slew of currency markets surged while the dollar plunged after the Bank of England (BOE) and the European Central Bank (ECB) held rates steady and left the door open for more easing, if needed. Mario Draghi said the ECB is technically ready to lower rates in to negative territory and said he will maintain an accommodative stance for as long as needed. In the US, weekly jobless claims fell -11k to a seasonally adjusted 346k which barely missed the Street’s estimate for 345k. Before Friday’s open, the Labor Department said us employer’s added 175k new jobs in May which topped the Street’s estimate for 169k. The unemployment rate rose to 7.6% in May from 7.5% in April.
MARKET OUTLOOK: Bulls Defend Support
For weeks we have mentioned that the market was over extended to the upside and due for a light volume pullback to shake out the weak/late longs and that is exactly what happened. We will be closely watching these key areas and how they react with respect to their 50 DMA lines: The Nasdaq Composite, Nasdaq 100, Housing (XHB), Financials (XLF), Transports (IYT), Health Care (XLV), Utilities (XLU), Small (IWM) and Mid caps (MDY) are all back above their respective 50 DMA lines. For those of you that are new to our work, we keep track of the market status differently than other people. Our goal is to remain in sync with the broader trend of the market (up or down) and not get caught up with the minutiae of changing labels on the market status very often. Looking forward, the bulls remain in control of this market as long as the benchmark S&P 500 holds above its 50 DMA line. As always, keep your losses small and never argue with the tape.