6th Consecutive Weekly Decline

Friday, June 10, 2011
Stock Market Commentary:

Stocks and a slew of commodities ended lower for the 6th consecutive week as fear spread that the global recovery may be in jeopardy. 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 but Thursday’s lows were promptly breached on Friday which reset the day count and removed the chance for a new rally to be confirmed in the near future. Ideally, the FTD will occur when the major averages are back above their respective 50 DMA lines. Until then, 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-Wednesday’s Action- Bears Are In Control

Stocks and a slew of commodities ended lower on Monday as fear continued to spread that the global economy is slowing. Since the beginning of May, Bloomberg.com estimates more than $2 trillion has been wiped out from the value of global equities due in part to a slew of disappointing economic data. China’s Shanghai index has fallen over -20% from its recovery high which technically defines a bear market. All the major U.S. averages have sliced below their short term levels of support and just violated their 9-month upward trendlines. The benchmark S&P 500 index is down nearly -6% from its three year high of 1370 and is currently trading at 12.3 times estimated earnings which is the lowest valuation since September 2010.

Before Tuesday’s open, Dallas Fed President, Richard Fisher, told  CNBC that he is expecting the U.S. economy to rebound nicely in the latter half of the year. It is important to note that 2010′s economy started off slowly but picked up nicely in the latter half. Many attribute that strong rebound to the Fed’s QE2 program which pumped hundred’s of billions of dollars into the market (and is scheduled to end this month). Fisher is not a fan of QE 2 and said he does not favor QE 3. 15 minutes before the close, Fed Chairman Ben Bernanke spoke in Atlanta and largely reiterated his recent stance: the economy continues to improve while inflationary pressures remain transitory (short term in nature) and any further action from the Fed will be “data dependent.”.

On Wednesday, stocks were quiet as investors digested Bernanke’s speech and the latest round of economic data. The World Bank lowered its global gross domestic product (GDP) outlook and said the global economy may grow by +3.2% this year which was lower than their latest forecast of+3.3% in January. Elsewhere, German industrial production unexpectedly fell for the first time in four months in April which is the latest in a series of disappointing economic data. Just after 2pm EST, the Fed released its Beige Book and said economic growth was softening in some areas of the country. The report showed 4 out of the 12 districts in the U.S. are growing at a slower pace. In other news, Fitch rating agency put U.S. treasuries on a negative watch and said they could be rated “junk” in August.

Thursday & Friday’s Action- Economic Data Mixed:

Before Thursday’s open, the Labor Department said U.S. jobless claims rose by 1,000 to 427,000 in the first week in June. The prior week’s reading was revised higher to426,000. A separate report showed the U.S. trade deficit contracting in April to its lowest level of 2011. Exports jumped to a new high, thanks in part to a weaker dollar, and oil purchases plunged due to surging energy prices. The overall deficit fell -6.7% to $43.68 billion which fell short of the Street’s expectations. Elsewhere, the European Central Bank (ECB) decided to hold rates steady +1.25% for a second straight month which matched expectations. ECB President Jean-Claude Trichet said “strong vigilance” was needed to contain inflation. Many ECB pundits who like to read between the lines believe that this is Trichet’s way of hinting further rate hikes may be on the horizon. Stocks opened lower on Friday as many of the structural issues that sent stocks lower over the past 6 weeks remain unresolved.

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.

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. Looking forward, the next level of resistance for the major averages is their respective 50 DMA lines then their 2011 highs. The next level of support is their longer term 200 DMA lines. If you are looking for specific help navigating this market, please contact us for more information.

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