Stocks Erase 2011 Gains; Day Count Reset

Wednesday, June 15, 2011
Stock Market Commentary:

Stocks and a slew of commodities were smacked on Wednesday, effectively giving back all of Monday & Tuesday’s gains and turned lower for the year after inflation jumped in the U.S. and the latest round of economic data was tepid. 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. Now that Monday’s lows (Day 1) are breached, the day count is reset and the possibility of a proper FTD is off the table until we get a new “up” day and restart the day count. 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.

Inflation Jumps; Economic Data Disappoints:

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!

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 cautious 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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Stocks End Lower On Tepid Economic Data

Market Commentary (11.18.09):

The major averages closed lower after a series of mixed economic data was released. Volume, a critical component of institutional demand, was higher than Tuesday’s levels which marked a distribution day for the Nasdaq but the losses were too small to constitute a distribution day for the NYSE. However, the fact that the major averages were down for most of the session and closed near their intra day highs helps offset that concern. There were 40 high-ranked companies from the Leaders List making a new 52-week high and appearing on the BreakOuts Page, the same number of issues that appeared on the prior session. In terms of new leadership, it was encouraging to see new 52-week highs outnumber new 52-week lows on the NYSE and Nasdaq exchange.

Economic Data:

The big economic news of the day was released before the market opened, at 8:30 am (EST). In Washington D.C., the Labor Department released a stronger-than-expected consumer price index (CPI) which ignited inflationary concerns. Headline CPI rose +0.3% which was higher than the Street’s forecast for a +0.2% gain.  Core CPI, which excludes food and energy, was unchanged from last month’s reading of a +0.2% gain. However, core prices also topped the Street’s estimate for a +0.1% gain and is the component of the report that the Federal Reserve tends to focus on. The uptick in consumer prices sparked concern that companies will have little room to raise prices this holiday season (which curbs earnings). The primary reason is that the consumer remains weak: unemployment is at a 26-year high of +10.2% and wages fell -5.2% in September from the same period last year. The Commerce Department released a separate report at 8:30am (EST) which showed that housing starts unexpectedly tanked last month. Housing starts (a.k.a registrations for new construction for residential housing units), slid -10.6% in October which was well below estimates. Permits for new construction slid -28.9% from the same period last year which led many to question the sustainability of the housing recovery.

Focus On Price & Volume, Not The Noise

Those of you who have read this commentary over the past 5 years know that we like to analyze the news but pay a lot more attention on how the market reacts to the news. That said, the market has reacted and continues to react rather well to the latest round of economic and earnings data. The vast majority of third quarter earnings are now behind us and the major averages remain perched just under fresh 2009 highs! Barring some unforeseen event, earnings were down for the average company in the S&P 500 for the ninth straight quarter but managed to exceed the average estimate which is one reason why the market’s have reacted rather well to earnings. That, coupled with the notion that the “worst is behind us” explains the market’s collective “take” on Q3 earnings. In addition, economic data, although not impressive, has improved markedly from this time last year which suggests the global government stimulus packages are working. The benchmark S&P 500 has surged a whopping +64% from its 12-year low in March as global GDP rebounded. The eight-month rally has pushed the index’s p/e ratio (i.e. valuation) to 22.3 which is the highest reading since 2002 according to Our two primary concerns regarding this rally remains: the dearth of high quality leadership triggering technical buy signals & waning volume in recent weeks. Continue to focus on our two favorite sectors right now: large cap technology and gold as a good proxy for the market.