Stocks Flirting With Support

Thursday, June 16, 2011
Stock Market Commentary:

Stocks and a slew of commodities were quiet on Thursday as the major averages remain on track for a 7th consecutive weekly decline. 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 benchmark 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.

Jobless Claims & Housing Starts Top Estimates:

Economic data was mixed on Thursday. The Labor Department said jobless claims slid -16,000 last week to 414,000 (the prior week was revised up +3,000 to 430,000). 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. This was the first stronger than expected reading for the ailing housing market in recent memory. 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.

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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