Friday, June 17, 2011
Stock Market Commentary:
Stocks and a slew of commodities ended a volatile week mixed as investors digested a slew of “slower” than expected economic data and the situation in Greece appears to be winding down. The Dow Jones Industrial Average and benchmark S&P 500 managed to snap a 6-weekly losing streak after finding support near their respective 200 DMA lines. However, the tech-heavy Nasdaq composite ended lower for its 5th consecutive weekly decline and definitively closed below its 200 DMA line. Remember, it is quite normal to see markets “bounce” after a steep decline. Going forward, the key is to study the “bounce” and wait for a powerful up day (follow-through day) to confirm a new rally attempt. Thursday marked Day 1 of a new rally attempt for the S&P 500, the Dow Jones Industrial Average, and the small-cap Russell 2000 index. Therefore, as long as Thursday’s lows are not breached, the earliest a proper FTD could emerge would be Tuesday. However, if Thursday’s lows are breached, the day count will be reset. It is important to note that until a new FTD emerges, the bears remain in control of this market. So far, the old adage, “Sell in May and Go Away,” appears to be working brilliantly as all the major averages and a slew of key commodities are down significantly from their May 2011 highs.

Monday & Tuesday’s Action: Stocks Bounce

Before Monday’s open, a flurry of merger and acquisitions (M&A) were announced. Two of the most prominent were Transatlantic Holdings Inc. (TRH) and Timberland C. (TBL). Transatlantic Holdings, the reinsurer formerly owned by American International Group Inc. (AIG), surged over 15% after agreeing to merge with Switzerland’s Allied World Assurance Company Holdings AG. Timberland Co. (TBL) gapped up after agreeing to be acquired by VF Corp. (VFC) for about $2 billion. China’s lending fell in May and money supply grew at the slowest pace since 2008 which suggests their red-hot economy is slowing.
Before Tuesday’s open, China said inflation in May rose to a 34-month high of +5.5%, topping the+5.4% expected on the Street. In response to the uptick in inflation, China’s central bank raised bank reserve requirements for the ninth time since October 2010 in an attempt to curb inflation and their red-hot economy. In the U.S., retail sales fell while inflation eased marginally. U.S. retail sales fell –0.2% in May for the first time in 11 months. The Commerce Department also lowered April’s reading to 0.3%. A separate report released by the Labor Department showed the producer price index (PPI) increasing +0.2% in May. That was down from April’s rather high reading of +0.8% and March’s reading of +0.7%, reaffirming Bernanke’s outlook that inflation may be transitory. Over the past 12 months, the producer price index rose +7.3% which is the largest increase since September 2008.
Wednesday-Friday: Volatility Picks Up
Before Wednesday’s open, the Labor Department reported a mixed to higher reading in their closely followed consumer price index (CPI). Headline CPI rose a seasonally adjusted +0.2%, down from +0.4% in April but topped estimates for an unchanged reading. Core prices, which exclude food and energy, experienced their largest gain in nearly three years, rising +0.3%. May’s reading topped the median forecast and April’s reading of +0.2%. The data shows inflation is accelerating in other areas of the economy, not just food & energy, which is not ideal.
Other economic data reaffirmed the notion of a massive slow-down in the U.S. economy. The empire state manufacturing survey fell for the first time since November 2010 and came in way below estimates. General business conditions in the NY area tumbled -20 points to -7.79 in June. The Street was expecting a positive reading of 12. Not only was the “miss” large, it was also below the all important boom/bust level of zero.   A separate report showed industrial production modestly increased in May but did little to impress the Street. Overall industrial production edged up+0.1%, following an unchanged reading in April. The report also “missed” estimates for a +0.2% gain. It was also disconcerting to see that the National Association of Home Builder’s sentiment survey plunged three points in June to 13, which is the lowest level since September 2010!
Economic data was mixed on Thursday. The Labor Department said jobless claims slid -16,000 last week to 414,000. The closely followed four-week average, which smooths out the data, was unchanged at 424,750.  Elsewhere, housing starts topped estimates and rose by +3.5%, following a revised -8.8% drop in April. May’s annualized rate was +0.560 million units which topped the Street’s projection for +0.547 million units. However, the reading fell -3.4% compared to the same period last year. Shortly after Thursday’s open, the Philly Fed Survey missed estimates and fell into negative territory. The index came in at negative -7.7 which was the first negative reading since September 2010 and below the Street’s estimate for a positive +7. Stocks opened higher on Friday after Greece fired its finance minister and announced a massive cabinet reshuffling in an effort to move forward with much needed economic reforms. However, Asian stock markets were mostly lower, with China’s Shanghai Composite sliding to a new 2011 low.

Market Outlook- Market In A Correction:

From our point of view, the market is back in a correction now that all the major averages closed below their respective 50 DMA lines and important upward trendlines. Since the beginning of May, we have urged our clients and readers to be extremely cautious as the major averages and a host of commodities began selling off. Looking forward, the next level of resistance for the major averages is their recent lows (i.e. 1294 in the S&P 500) and then their respective 50 DMA lines. The next level of support is their longer term 200 DMA lines and then their March 2011 lows.
For those of you that are interested, the S&P 500 hit a new 2011 high on May 2, 2011. Two days later, on Wednesday, May 4, 2011, we turned cautious and said “The Rally Was Under Pressure” (read here). Then on Monday, 5.23.11, we changed our outlook to “Market In A Correction” (read here). On Monday, June 6, 2011 we pointed out that the S&P 500 violated its 9-month upward trendline (read here) and reiterated our cautious stance. We have received a lot of “thank you” emails for being “spot on” in our approach. We are humbled by your presence and very thankful for your continued support. If you are looking for specific help navigating this market, please contact us for more information.

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