M&A News Helps Stocks; China’s Money Supply & Lending Shrinks

Monday, June 13, 2011
Stock Market Commentary:

Stocks and a slew of commodities bounced after 6th consecutive weekly losses. 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. Monday marked Day 1 of a new rally attempt which means as long as Monday’s lows are not breached the earliest a new rally can be confirmed will be Thursday. However, if Monday’s lows are breached then the day count will be reset and lower prices will likely follow. 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.

M&A News Helps Stocks & China’s Lending & Money Supply Shrinks:

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.

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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