Awful Month on Wall Street; Stocks Close Below 200 DMA Line!

Friday, May 28, 2010
Stock Market Commentary:

The major averages closed in the upper half of their weekly ranges after falling to fresh 2010 lows. Volume totals have been bearish, evidenced by higher volume declines and lighter volume advances. Breadth remains less than stellar as decliners steadily outpace advancers on the NYSE and Nasdaq exchange. The number of high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page have plunged to single digits in recent sessions which is not encouraging. Finally, the number of new 52-week lows has inched higher on both major exchanges which is not a welcomed sign. 

Monday & Tuesday’s Action- Stocks Fall on Geopolitical Tensions:

Stocks closed lower on Monday after the National Association of Realtors said sales of existing homes (i.e. previously owned homes) rose in April to the highest level in five months. The report said buyers scrambled to buy the homes before the government’s tax credit expired. Sales increased +7.6% to a 5.77 million annual rate. This was the highest reading since November 2009 which was the month the incentive was first due to expire. The market closed mixed on Tuesday after geopolitical tensions escalated between North and South Korea.

Wednesday’s Action: US Economic Data Is Healthy:

On Wednesday the major averages and the euro negatively reversed (opened higher but closed lower) after Italy announced that it will restructure $30 billion in debt and Germany’s bond auction was weak. In the US, the economic news was healthy as new home sales and durable goods both jumped to multi year highs. New home sales rose +15% to an annual pace of +504,000 last month. This was the highest reading in two years which bodes well for the ailing housing market. The report showed that the median price of a new home fell to $198,400 which was the lowest level since December 2003. It was interesting to see that the vast majority of new sales occurred in houses costing less than $300,000 which reflects demand from first-time buyers due to the now expired tax credit. Elsewhere, the Commerce Department said durable goods orders jumped +2.9% which was the highest reading in at least three years.

Thursday & Friday: Stocks Positively Reverse After Hitting Fresh 2010 Lows:

Stocks surged around the world after China said it remains a long-term investor in Europe, which helped the euro snap a losing streak and allowed China’s stock market to score a follow-through day (FTD). In the US, two important economic reports were released: gross domestic product (GDP) and weekly jobless claims. The government said the US economy grew at a slower pace than previously expected in the first quarter and jobless claims fell less than economists expected. First quarter GDP rose +3% compared to April’s reading of a +3.2% increase. Meanwhile, the Labor Department said, initial jobless claims fell by -14,000 to 460,000 in the week ended May 22 which was lower than the Street’s forecast of 455,000. On Friday, stocks ended lower after Spain’s credit rating was cut and the market prepared for a long holiday weekend.

Market Action- In A Correction:

Friday marked Day 4 of a new rally attempt for the benchmark S&P 500 Index and Day 2 for the other major averages. That said, as long Tuesday’s lows are not breached in the S&P 500, and Thursday’s for the Dow Jones Industrial Average & the Nasdaq composite, the window is now opened for a proper follow-through day (FTD) to occur. However, if at anytime Tuesday’s S&P 500 Index lows are breached, then the day count will be reset for that index. Concurrently, if the DJIA or the Nasdaq composite undercut Thursday’s lows then the day count will be reset for those indexes. What does all of this mean for investors? Simple, the market remains in a correction which reiterates the importance of adopting a strong defense stance until a new rally is confirmed. Trade accordingly.