Stocks Negatively Reverse On A Weekly Basis

SPX---STOCK MARKET COMMENTARY:
FRIDAY, MAY 24, 2013

Stocks negatively reversed on Wednesday after the Fed hinted that they may begin tapering as soon as next month. 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. For the past few weeks we have noted that “the market is getting extended and a pullback of some sort rises everyday as the S&P 500 keeps getting extended from its 50 DMA line.”

MONDAY-WEDNESDAY’S ACTION: Fed Spooks Markets

Stocks were quiet on Monday as investor’s attention shifted to commodities. Gold and Silver rebounded sharply after falling hard in overnight trade. At one point, Silver plunged over 8% and took out April’s low. By Monday’s opening bell, the bulls quickly showed up and quelled the bearish pressure leading many to question whether or not silver is tracing out a potential double bottom pattern? We are of the mindset that both Gold and Silver are in bear markets and until that changes, the Separately, a slew of oil and gas stocks surged on Monday as the USO (Crude Oil ETF) broke out of a 9-month downtrend. 

Stocks rallied for the 19th consecutive Tuesday as this bull market continues unabated. Tim Cook’s CEO testified on Capitol Hill and defended Apple’s tax record. Cook said Apple has paid “Every Single Dollar” owed in taxes and argued that the tax rate for repatriated funds should fall from 35% to something more “reasonable.” Separately  St Louis Fed president James Bullard and NY Fed president William Dudley gave dovish comments on QE and defended the Fed’s recent action. 
 
Stocks opened higher on Wednesday but negatively reversed after hitting record highs in nearly all the indices. This is not healthy and could mark a short-term inflection point. This action reminds us of the classic buy the rumor and sell the news as Bernanke testified on the hill. Bernanke waffled back and fourth but opened the door to tapering QE as soon as their June meeting. In the afternoon, the minutes of the Fed’s last meeting were released which showed a split room. Most of the members favored continuing QE until the economy recovered while some favored ending it sooner rather than later. Economic data was positive. Existing home sales jumped +0.6% to an annual rate of 4.97 million units which was the highest level since November 2009.  

THURSDAY & FRIDAY’S ACTION: Nikkei Plunges

Overnight, Japan’s Nikkei plunged over 1,000 points or 7% which was the largest single day decline since their tragic earthquake/nuclear mess from two years ago. China said its flash HSBC Purchasing Manager’s index in May slid to 49.6 for the first contraction since October 2012. US Economic data was mixed, largely beating estimates. Initial jobless claims slid to 23k to 340k which bodes well for the ailing jobs market. Meanwhile, housing data showed continued signs of recovery. The Federal Housing Finance Agency (FHFA) said home prices rose 1.3% in March while a separate report showed new home sales rose 2% to 454k in April. Finally, the Markit Manufacturing Purchasing Managers Index For May Fell to 51.9 which was the lowest level since October. Stocks opened lower on Friday after durable goods rose 3.3% in April beating estimates for a gain of 2.7%.

MARKET OUTLOOK: CONFIRMED RALLY

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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