The major averages enjoyed their first monthly gain in May since 2009 and their first Jan-May winning streak since the 90’s as the Fed continues flood the system with liquidity. Stocks negatively reversed on Wednesday, May 22, 2013 after the Fed hinted that they may begin tapering as soon as June. From our point of view, this marked a significant inflection point in the market as the narrative has shifted. So far, every pullback this year has been very shallow in both size (% decline) and scope (days, not weeks). Needless to say, we will be watching this pullback very closely to see if it is just another shallow pullback or something more severe. The next level of resistance is 1687 and the next level of support is 1600 for the S&P 500.

On Monday, U.S. stocks were closed in observance of Memorial Day. Overseas markets were relatively quiet. On Tuesday, overseas stocks rallied helping US futures jump before the open. The catalyst which sent stocks occurred when the Bank of Japan and the European Central Bank reaffirmed that their stimulus policies would remain in place which bodes well for this Central Bank driven rally. Stocks enjoyed sizeable gains on Tuesday which was the Dow’s 20th consecutive up Tuesday this year. In the US, the Case-Shiller index rose 1.4% in March and surged 10.9% from the same period in 2012. This was the largest annual rise in home prices since 2006 and bodes well for the housing recover. Elsewhere, the Conference Board said US consumer confidence topped estimates and jumped to the highest level since February 2008. The Richmond Fed Manufacturing Index fell -2 but beat the Street’s estimate for a decline of -3. The Dallas Fed Manufacturing production index rose 11.2.
Stocks opened lower on Wednesday after interest rate sensitive areas of the market were smacked and the OECD and the IMF slashed their growth forecasts for the global economy. The Organization for Economic Cooperation and Development (OECD) downgraded their global growth estimate to 3.1% in 2013 from its earlier forecast of 3.4%. It also lowered its 2014 forecast to 4% from 4.2% in its latest report. Separately, the IMF warned that Chinese growth this year will be 7.75% lower than its earlier forecast of 8.0% as a result of weaker demand for its exports.

Stocks rallied on Thursday as investors digested a slew of mixed economic data. Before Thursday’s open, the government said Q1 GDP rose by 2.4% which was lower than the 2.5% estimate. The Labor Department said weekly jobless claims rose by 10k to 354k which was higher than the Street’s estimate for a gain of 340k. Shortly after the open, the National Association of Realtors said pending home sales rose by 0.3% in April which was the highest level in three years. Stocks were quiet on Friday as investors digested a slew of mixed economic data. U.S. consumer confidence topped estimates and jumped to its highest level in nearly six years. Midwest business activity rose to 58.7 topping the the average estimate for 50. Separately, consumer spending fell -0.2% in April for the first decline in nearly a year while personal income growth was flat, missing the Street’s estimate for a gain of 0.1%.

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. The bulls would like to see this market pullback in light volume and find support at/near their respective 50 DMA lines. It is important to note that the S&P 500 held its 50 DMA line almost to the penny in the middle of April on a closing basis which was a very healthy event. 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, I keep track of the market status differently than other people. My 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.

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