Short Term, Bounce Possible. Longer Term..?
It was another disappointing week for the key indexes,
as a sharp bounce on Wednesday got the bottom-pickers all giddy but didn’t
hold. While the overall declines were not dramatic, it was noteworthy to see
continued breakdowns in key bellwethers such as Wal-Mart, Best Buy and AIG. In
addition, certain economic reports started to show signs of slowing growth,
which triggered concerns about stagflation. One of the major reasons why stocks
didn’t post worse declines likely had a lot to do with the oversold condition of
the major indexes coming into the week and the high level of bearishness. On a
positive note, the 10-yr note was finally able to bounce as the bigger
commercial traders stepped up their net long bets last week, and went a long way
towards stabilizing Financial shares.
The June
SP 500 futures closed out the week with a small gain of +2.25 points, while the
Dow slipped another -43 points, and finished in the red for the 4th week in a
row. Looking at the weekly charts, the ES posted a doji after bouncing off of
support marked by the year’s low. On a daily basis, the contract ran into hard
resistance marked by 4 MAs and its daily downtrend line, and ended up posting a
large bearish engulfing line. The YM posted a weekly inverted hammer after
bouncing just above the year’s low. For you daily 3-Line Break followers, the
ES remains short with a Break Price of 1190.75, while the YM broke short again
with a new Break Price of 10558.
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In recent
days, evidence of a slowdown in the consumer portion of the economy has
continued to mount. Not only are many of the companies reporting softer sales,
such as Best Buy, but the charts of many larger retail companies are breaking
down as well (i.e. Wal-Mart). This should really not be a shock, given the
combination of higher short-term rates and surging commodity prices. However,
many market players have been caught off guard, and I believe the reason is a
sense of complacency regarding the consumer’s ability to keep spending at the
same rapid pace.
It’s
interesting to see the talking heads put a positive spin on the recent economic
reports. Last week, it was reported that Q4 GDP growth was lower-than-expected,
while prices were higher-than-expected. Keep in mind, Consumer Spending
accounts for roughly 66% of total GDP. So, even a small decline in consumption
could be enough to significantly curtail economic growth. And this is happening
at a time when the Fed is firmly in tightening mode in order to contain
inflationary pressures. Historically, this would not be the most favorable
scenario for the equity markets.
^next^
At the
moment, the key indexes do remain oversold, so a decent bounce definitely
remains possible. However, beyond any normal short-term rally, the longer-term
prospects for the equity markets are definitely a concern. Remember to remain
objective and not to get caught up in the bottom-picking hype we’re seeing on a
daily basis. It’s not fit to print here what normally happens to
bottom-pickers, but if you’d like to know, feel free to email me and I’ll tell
you.
 
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Please feel free to email me with any questions
you might have, and have a great trading week!
Chris Curran
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