Day 2: Stocks Rally As Inflation Eases

Tuesday, June 14, 2011
Stock Market Commentary:

Stocks and a slew of commodities bounced after inflation eased in the U.S. 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. Ideally, the FTD would occur anytime after Day 3 of 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. 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.

Inflation Tops Estimates In China, Misses Estimates In The U.S:

Before Tuesday’s open, China said inflation in May rose to a 34-month high of +5.5%, topping the +5.4% expected on the Street. In response to the uptick in inflation, China’s central bank raised bank reserve requirements for the ninth time since October 2010 in an attempt to curb inflation and their red-hot economy.

In the U.S., retail sales fell while inflation eased marginally. U.S. retail sales fell –0.2% in May for the first time in 11 months. The Commerce Department also lowered April’s reading to 0.3%. A separate report released by the Labor Department showed the producer price index (PPI) increasing +0.2% in May. That was down from April’s rather high reading of +0.8% and March’s reading of +0.7%, reaffirming Bernanke’s outlook that inflation may be transitory. Over the past 12 months, the producer price index rose +7.3% which is the largest increase since September 2008. The consumer price index (CPI) is slated to be released before Wednesday’s open.

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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