Stocks Snap A 2-Week Winning Streak As Global Economy Slows

SPX- Broken Upward Trendline
SPX- Broken Upward Trendline

Friday, June 22, 2012
Stock Market Commentary:

Stocks and a slew of other “riskon” assets were smacked in the third week of June as the latest economic data reaffirmed the notion that the global economy is slowing and hope for another round of QE to stimulate the economy was temporarily taken off the table. In early May, all the major averages sliced below their respective 50 DMA lines which prompted us to label this market “in a correction.”  Then in early June the bulls showed up and defend the 200 DMA lines. Then, the major averages rallied sharply, broke above a neckline of a small head and shoulders pattern, and briefly traded back above their respective 50 DMA lines. However, the party was short-lived as the bears showed up after the Fed meeting and sent all the major average crumbling back below their respective 50 DMA lines and negated the latest H&S breakout.

Monday-Wednesday’s Action- Bad News is “Good” News: G-20 Is A Flop

On Monday, stocks rallied in the wake of the favorable results from the Greek election on Sunday. As you all know, the “people” voted fro the pro-bailout party and decided to keep the Greece in the euro-zone (for now). The G-20 began their latest dog and pony show in Mexico on Monday which failed to yield any significant results. The ongoing European debt crisis continues to get worse and unfortunately no one in world has a solution for it (at least at a public level). We all know what needs to be done but it is very difficult (massive reforms, let the weak fail, et al) and is not politically correct.

On Tuesday, the major averages jumped above their respective 50 DMA lines as the Fed began their two-day meeting and the latest round of economic data was released. The Commerce Department said housing starts slid -4.8% to a seasonally adjusted rate of 708,000 units in May. The “good” news came from building permits. The report showed that building permits (permits to build new homes) jumped to the highest level in more than three years which bodes well for the summer building season. Stocks slid in the final hour after a German official said there were no plans to use the EU’s rescue fund to buy bonds of debt-laden nations.

Stocks were relatively quiet on Wednesday as all eyes were glued to the Fed. The Fed decided to take the path of least resistance and extend its operation twist until the end of the year. Initially, risk assets sold off but quickly rebounded after the Fed made it clear that QE 3 would be implemented if “needed.” The Fed expects real GDP growth for 2012 to range from 1.9% to 2.4%, down from the range of 2.4% to 2.9% that was previously projected. Unemployment for 2012 is now expected to range from 8.0% to 8.2%, which is up from the previously forecasted range of 7.8% to 8.0%. Inflation pertaining to total personal consumption expenditures is now expected to the range from 1.2% to 1.7%, while the core rate is now expected to range from 1.7% to 2.0%.

Thursday & Friday’s Action- Fed Disappoints:

Stocks were smacked on Thursday as the latest round of economic data confirmed the thesis that the global economy is slowing. China’s PMI manufacturing index missed estimates – again. Weekly jobless claims in the US were worse than expected- again. Last week’s report was revised higher to help soften this week’s disappointment. Existing home sales, you guessed it, missed estimates and the elephant in the room was the huge miss from the Philly Fed Survey. The report showed a reading of -16.6% which was sharply lower than the Street’s estimate for a small gain of +0.5%. The final nail in the bull’s coffin was when Goldman Sachs released a note recommending their clients short the S&P 500. All those sent stocks, and a slew of other risk assets, sharply lower. After Thursday’s close, Moody’s, a popular rating agency, downgraded a series of banks across the globe. This added pressure to the already fragile financial sector. Stocks opened higher on Friday after the downgrades were not as bad as many people had expected.

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. Looking forward, we want to see a powerful accumulation day to confirm the latest rally attempt. Technically, the 200 DMA line and June’s lows are the next level of support while the 50 DMA line is the next level of resistance for the major averages. 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!




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