Stocks and a slew of other “riskon” assets were smacked last week as the latest round of data confirmed our longstanding thesis that the global economy is “slowing, not growing. From a technical standpoint, the action is weak and continues to get “weaker.” In early May, all the major averages sliced below their respective 50 DMA lines which prompted us to label this market “in a correction.” For the past few weeks, we have written about the importance of being defensive especially because the action in the major averages and a slew of leading stocks deteriorated. After the sharp fall, the bulls showed up and did their best to defend the longer term 200 DMA lines for the major averages. The NYSE composite is the only popular index that couldn’t hold above its 200 DMA line. At this point, the next level of support for the major averages is their respective 200 DMA lines. If that level is “broken” then we have to expect another leg lower to begin.
Monday-Wednesday’s Action- European Woes Continue To Dominate The Headlines:
U.S. Stocks were closed on Monday in observance of the Memorial Day holiday. Stocks opened higher on Tuesday but the bulls quickly ran out of gas after Spain was downgraded by Egan-Jones. It was the second time the small rating agency cut Spain’s rating in a week. Despite the downgrade, U.S. stocks ended the day with nice gains as investors focused on encouraging polls from Greece that favored their more bailout friendly party ahead of the June 17 election. In other news, the S&P/Case Shiller index showed that home prices in the U.S. edged higher; gaining +0.1% in March which missed the Street’s expectation for a gain of +0.2%. A separate report showed that U.S. consumer confidence fell to 64.9 in May which was the lowest level in four months and missed the Street’s forecast of 70.0.
Stocks were pounded on Wednesday after the euro sliced below 1.24 vs the USD which was the lowest level since 2010. To put this ominous action in perspective, the last time the euro was this low the S&P 500 was trading at just above 1000! This weighed on other “riskon” assets sending crude oil into bear market territory (defined by a decline of >20% from its 2012 high) and erased copper’s gains for the year. The latest economic data from the U.S. was not ideal. The National Association of Realtors said pending home sales slid by -5.5% in April which missed estimates for a gain of +0.1% and hit a fresh four month low. In other news, the European Commission said the euro zone must move towards a banking union (a more unified and centralized banking system), cut debt, and issue eurobonds in order to stem the crisis and boost growth. The report occurred after fresh concerns spread regarding Spain’s ability to stay in the euro zone. The yield on Spanish debt soared and Italy’s debt auction fell short of estimates which also added pressure on the already fragile eurozone.
Thursday & Friday’s Action- Global Economy Continues To Slow:
Stocks were quiet on Thursday as investors digested a slew of economic data. Before the bell, the Labor Department said weekly jobless claims rose by 10,000 to a seasonally adjusted 383,000, gaining for the fourth consecutive week (which is not healthy for the jobs market).The ADP, the country’s largest payrolls company, said U.S. employers added 133,000 new jobs in May which missed the Street’s estimate for a gain of 150,000. The Commerce Department said the U.S. economy grew at a slower pace than expected in the first quarter of 2012 with GDP growing at a +1.9% annual rate. Not only did it miss the Street’s estimate but it was also lower than last month’s initial projection of +2.2% and Q4 2011’s +3.0% rate. The Chicago Purchase Managers Index for May fell to 52.7 in May from 56.2 in April. Investors were disappointed because they were expecting a reading of 56.5. Stocks were clobbered on Friday after the latest data from China & the US pointed to slower not stronger economic growth. US employers only added 69,000 new jobs last month as the unemployment rate jumped to 8.2%.
May 2012 was awful for most risk on markets. Crude oil officially entered bear market territory from its 2012 high, gold and copper were smacked and U.S. stocks held up better than most riskon markets but were also hit hard. The DJIA & the S&P 500 slid by more than 6% while the Nasdaq plunged nearly 7%. The Dow and Nasdaq posted their largest monthly declines since May 2010 (Flash Crash), while the S&P posted its largest single month decline since September 2011.
It is well known that a market should not be considered “healthy” unless it trades above its rising 200-day moving average (DMA) line. The fact that all the major averages are below both their 50 & 200 DMA lines bodes poorly for the near term. That said, the bears will likely remain in control until the popular averages close above their important moving averages and the euro catches a bid.
Looking forward, the window remains open for disciplined investors to carefully buy high-ranked stocks. Since the current rally began on July 1, the major averages have rallied on suspiciously light volume but has improved in recent sessions. It is ideal to see volume expand as the major averages break above resistance and see a new batch of high ranked leaders trigger fresh technical buy signals. These latest improvements are helping to confirm this nascent rally and provide a reassurance that odds are more favorable for successful investing using the fact-based system.
Ugly Action Continues On Wall Street: The market sold off hard last week as sellers continued to pound stocks. As previously mentioned, the vehemence of the sell-off suggests more time is needed before the bulls regain control. The tech-heavy Nasdaq composite has fallen (on heavier volume) in each of the past 3 weeks. All of the major averages are…
The market is currently in a correction which, according to historical precedent, suggests 3 out of 4 stocks will follow the market lower until a new follow-through day emerges. That said, taking the appropriate action on a case-by-case basis with your stocks prompts investors to raise cash when any holdings start getting in trouble. It is also important to note that the major averages have experienced multiple “corrections” since the March 2009 lows and each one has been mild at best (less than a -10% decline from the recent high). Therefore, it will be very interesting to see how low this correction goes before the bulls show up and defend support. Additionally, it is important to note that the market can go much lower (or higher) than anyone thinks; so it is of the utmost importance to filter out the “noise” and carefully analyze price and volume action of the major average for the best read on the health of the market. It will be very interesting to see how the market reacts to Friday’s nonfarm payrolls report slated to be released 8:30am EST.
– Want Sarhan Capital To Manage Your Portfolio? – Easy Money Reigns Supreme…For Now Once again, easy money, from the Fed and other central banks, continues to send stocks higher and distort the playing field. Every major central bank in the world is back in easy money mode (including the U.S. Fed). The easy money trade…
Monday, July 19, 2010 Stock Market Commentary The major averages ended higher on Monday after getting smacked on Friday. As expected, volume was reported lower than Friday’s session on both exchanges due to options expirations. There were only 7 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net…
