For the second straight week the bulls defend three important areas of support for the major averages: 50 DMA line, 6-month upward trendline, & April’s high. So far, every pullback this year continues to be very shallow in both size (% decline) and scope (relatively short) which bodes well for the bulls. The question is will this be a shallow pullback or turn into something more severe. From our point of view, until the market closes below support the bulls deserve the benefit of the doubt. The SPX is in a new trading range between 1687 (resistance) and 1600 (support).
Monday-Wednesday’s Action: Stocks Retest 50 DMA line
Thursday & Friday’s Action: Stocks Bounce Off Support
Stocks were quiet on Thursday after a slew of mixed economic data was released and Japan’s stock market plunged a whopping 850 points overnight and officially entered a bear market (defined by a decline of 20% or more from a recent high). The vehemence of the decline should not be taken lightly as the Nikkei plunged over 20% in only 3 weeks. In the U.S. the data was mixed to mostly positive. Weekly jobless claims fell by 12k to a seasonally adjusted 334k which bodes well for the jobs market. It was also healthy to see U.S. retail sales swell by 0.6% which topped the Street’s estimate for a gain of 0.4%. Investors were not happy to see import and export prices unexpectedly fall which points to weaker, not stronger, economic growth. Stocks were relatively quiet on Friday as the latest round of of economic data was released. Consumer sentiment slid to 82.7 in June which missed the Street’s estimate for 84.5. The producer price index (PPI) rose to 0.5% which beat the Street’s estimate for a gain of 0.1%. Industrial production was unchanged in May which missed the Street’s estimate for a gain of 0.2%. Finally, the current account deficit widened to 106.1 billion, missing the street’s estimate for a gain of 109.7 billion. The Washington-based IMF lowered its U.S. growth forecast for 2014 to 2.7%, from its earlier forecast of 3% in April. The IMF left its 2013 growth target steady at 1.9%.
MARKET OUTLOOK: Bulls Defend Support
For weeks we have mentioned that the market was over extended to the upside and due for a light volume pullback to shake out the weak/late longs and that is exactly what happened. We will be closely watching these key areas and how they react with respect to their 50 DMA lines: The Nasdaq Composite, Nasdaq 100, Housing (XHB), Financials (XLF), Transports (IYT), Health Care (XLV), Utilities (XLU), Small (IWM) and Mid caps (MDY) are near their respective 50 DMA lines. For those of you that are new to our work, we keep track of the market status differently than other people. 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. Looking forward, the bulls remain in control of this market as long as the benchmark S&P 500 holds above its 50 DMA line. As always, keep your losses small and never argue with the tape.