Stocks Bounce; 200 DMA Line Next Level of Support

Friday, May 25, 2012
Stock Market Commentary:

Stocks and a slew of other “risk assets” ended mixed to mostly lower last week as the euro dragged risk assets lower as it continued to fall to a fresh multi-year low. From a technical standpoint, the action is weak and continues to get “weaker.” In early May, all the major averages sliced below their respective 50 DMA lines which prompted us to label this market “in a correction.”  For the past few weeks, we have written about the importance of being defensive especially because the action in the major averages and a slew of leading stocks deteriorated. After the sharp fall, the bulls showed up and did their best to defend the longer term 200 DMA lines for the major averages. The NYSE composite is the only popular index that couldn’t hold above its 200 DMA line. At this point, the next level of support for the major averages is their respective 200 DMA lines. If that level is “broken” then we have to expect another leg lower to begin.

Monday-Wednesday’s Action- European Woes Continue To Dominate The Headlines:

As expected, the G8 summit failed to produce any tangible solutions for the ongoing European debt crisis. However, stocks staged a very strong rally from deeply oversold levels on Monday, helping the benchmark S&P 500 snap a 6-day losing streak and enjoy its largest single day advance in two months. The major averages simply bounced from deeply oversold levels and rallied on about average volume which was nothing to write home about. Nonetheless, Monday marked Day 1 of a a new rally attempt which means a new rally can be confirmed as soon as Thursday providing Monday’s lows are not breached.  All we need to see in order to confirm a new rally, from our point of view, is a large move (>1.7%) on heavier volume than the prior session in at least one of the major averages.  Until then, patience is king. On Monday, I was quoted on the front page of the WSJ.com talking about the Facebook IPO and then was a guest on CNBC”s Closing Bell to discuss the Facebook Saga and EU banks.

Thursday & Friday’s Action: EU Summit Flops- Still No Solution

Stock were flat on Thursday as investors waited to see if a solution would emerge regarding keeping Greece in the Eurozone. Economic data from Europe disappointed investors. Flash Manufacturing readings from France, Germany, and the broader eurozone missed estimates which bodes poorly for the global economy. Elsewhere, China also reported a disappointing Manufacturing PMI reading which is not ideal, especially because so many people are “hoping” that China and other emerging economies will be strong enough to lift the global economy. In the U.S., durable goods orders rose by +0.2% in April but missed the street’s estimate for a gain of +0.3%. Weekly jobless claims hit 370,000 which was just above the Street’s forecast for 365,000. Stocks were quiet on Friday as the Euro continued falling to fresh multi year lows and broke below 1.25 for the fist time since July 2010. Just for a reference, in July 2010 the S&P 500 was trading at 1010 (or -24% below current levels). Trade accordingly.

Market Outlook- In A Correction

From our point of view, the market is back in a correction now that all the major averages are back below their respective 50 DMA lines. April’s lows were breached and in the short term should now serve as resistance.  Looking forward the 200 DMA line and May’s lows are the next level of support. As always, keep your losses small and never argue with the tape. If you are looking for specific help navigating this market, feel free to contact us for more information. That’s what we are here for!