Another Lousy Week For Stocks

Friday, May 20, 2011
Stock Market Commentary:

Stocks and a host of commodities ended mixed to slightly lower this week as concern spread that economic growth may wane in the weeks and months ahead. So far, the old adage, “Sell in May and Go Away,” appears to be working brilliantly.  From our vantage point, the market rally remains under pressure due to the lackluster action in the major averages and several leading stocks.

Monday-Wednesday’s Action – 50 DMA line Is Support

Over the weekend, the head of the International Monetary Fund, Dominique Strauss-Kahn, was accused of raping a cleaning lady at a NYC hotel. This story dominated the headlines all week and forced him to resign as the director of the IMF. In other news, the earnings and economic data was mixed to slightly lower. Before Monday’s open, the NY Empire State manufacturing index fell nearly 10 points to 11.88 which was higher than the boom/bust level of zero which signaled expansion, albeit at a slower rate than prior months. In other news, the National Association of Home Builders released its housing market index which is based on a survey in which respondents from the organization rate the condition of the general economy and the housing market. The index matched the last reading of 16 which suggests more time is needed before the ailing housing market improves.

Before Tuesday’s open a slew of high profile companies released mixed-to-lower Q1 results and the latest economic data missed estimates. The Commerce Department said housing starts (a.k.a. new homes being built), fell -11% from March and missed the Street’s estimate of 569,000. Work began at an annual pace of 523,000 houses last month. The report showed that building permits, a sign of future construction, also fell. This was the latest in a series of disappointing data from the ailing housing market. A separate report showed that industrial production was unchanged in April which fell short of the Street’s estimate for a +0.4% increase.

Before Wednesday’s open, a slew of high profile companies (DELL, DE, TGT, among others) released their Q1 results which largely topped analyst estimates. At 2pm EST, the Federal Reserve Open Market Committee (FOMC), released the minutes of their latest meeting which largely reiterated their recent stance that the economy is improving while inflation pressures are largely short-term in nature.

According to the Stock Trader’s Almanac, there is some truth to the old adage, “Sell in May and Go Away. On average, the Dow Jones Industrial Average has rallied +7.4% during the period of November 1 through April 30 since 1950 (post WWII). The data also shows that the Dow Jones Industrial Average has only risen by +0.4% between May 1 and October 31. Further analysis of the data shows that the worst six-month periods in the market’s post WWII history have occurred between May-November (2010, 2008, 2002, and 2001, to name a few).

Thursday & Friday’s Action – Lousy Economic Data Weighs On Stocks:

Investors digested a slew of economic data on Thursday. On the plus side, the Labor Department said weekly jobless claims fell by -29,000 to 409,000 last week but the four-week average is still above 400,000. On the downside, existing homes sales missed estimates at a 5.05 million annual unit rate, down -0.8% in April and tanked –12.9% vs. the same period in 2010. Leading economic indicators fell -0.3% in April following a 0.7% jump in March. The report also missed the Street’s estimates. In other news, the Philly Fed Survey also missed estimates which suggests sluggish economic growth may be on the horizon. Stocks fell on Friday as concern spread that economic growth may slow after QE II ends in June.

Market Outlook- Rally Under Pressure

From our point of view, the market rally is under serious pressure which suggests caution is paramount at this juncture.  Looking forward, the next level of support for the major averages are their respective 50 DMA lines and resistance is their 2011 highs. The rally remains in tact as long as support holds on a closing basis. If you are looking for specific help navigating this market, please contact us for more information.

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