The major averages sliced below support on Thursday after the Fed opened to the door to taper QE sooner than initially expected. The benchmark S&P 500 is down in 4 of the past 5 weeks which suggests the bears are now in control of this market. For most of this year the 50 DMA line and the upward trendline (from November) served as formidable support. Therefore, until the market trades and closes above its upward trendline we have to believe that support should now become resistance.
MONDAY-WEDNESDAY’S ACTION: Fed Disappoints
Stock markets across the globe rallied on Monday after a series of stronger-than-expected economic data was announced. In Europe, Germany’s Bundesbank believes Europe’s largest economy will grow strongly in the second quarter which bodes well for the global economy. In the U.S., the Empire Manufacturing Index rose to 7.84 in June easily beating the Street’s estimate for unchanged and May’s reading of -1.43. The National Association of Home Builders said its monthly sentiment index of home builders jumped to 52 in June from 44 in May. A reading over 50 signals expansion, it was the first time this number topped 50 since April 2006 and it was the highest level in 7 years.
THURSDAY & FRIDAY’S ACTION: Stocks Break Support In Heavy Volume
Stocks were smacked on Thursday sending the major averages below support (50 DMA line, 6-month upward trendline, and April’s high). Overnight, factory activity in China slid to a 9-month low which hurt global demand. The economic data in the US was mostly mixed. The National Association of Realtors said existing home sales rose +4.2% in May to an annual rate of 5.18 million units which was the highest level in 3-1/2 years. Factory activity in the mid-Atlantic region rose to 12.5 in June which topped the Street’s estimate for -2 and easily beat May’s reading of -5.2. The big news of the day was the heavy selling across nearly every asset class. Stocks, Gold, Bonds, and a slew of other commodities, were smacked as investors now believe tapering may begin as soon as September. Stocks were quiet on Friday as investors tried to make sense out of this shellacking.
MARKET OUTLOOK: Support Breaks
The narrative has clearly shifted since the May 22, 2013 high (when Bernanke and the Fed hinted that they may taper QE sooner than initially expected). Now that the market is pulling back we shall be patient and let this pullback run its course. Our 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. As always, keep your losses small and never argue with the tape.