Market Commentary:
While today started out as a bullish continuance of yesterday’s rally, by mid-day it was clear that many investors were interested in taking profits, as sellers began to sell into the rally. The end result was that index prices ended slightly down for the day.
There was some real selling today, too. The Russell 2000 closed nearly -3% below the early highs of the day. This is typical of intermediate topping patterns. Those who have participated in the gains are eager to collect some profit and they take a little off the table when a decent rally takes off.
This is called “selling into the rally” and is characteristic of the end of intermediate advances.
Just the opposite is true at the end of intermediate declines, as late day buying is often used to pick up bargains after strong sell offs.
We had some more “better than expected” psychology used on us today. The first-time filings for state unemployment claims fell 14,000 for the week ended April 25th, marking the lowest level for the first time in two weeks.
Did you catch the last of that good news – “in two weeks?” Not two months, or not two years, but two weeks!
The problem with this spin is that total new claims were still a huge 631,000 last week. And the new hiring was so bad that this 14,000 “better number” is lost in the noise as continuing claims rose by 133,000 for the same period (almost ten times worse than the “improvement”).
Are you seeing the spin?
In truth, there is very little good economic data to back up all the talk. In fact, according to actual numbers and not forecast / expectations, the economic hole is being dug deeper with each passing week and month.
But the stock market is a forward looking animal and those in charge of the media, the large investment institutions and the government/Fed do what they can to take advantage of this. Often all it takes is a little psychology to save the system from itself, as confidence is just as important as data. Remember, consumer confidence was up this month.
Consider the following:
First of all, let’s consider the time frame and strength of the recent rally (still a bear market rally in my book based on lower lows and lower highs).
As you can see, this rally is following a curved path and is near or at the top of the curve, suggesting either a sideways chopping pattern ahead or, more likely, a correction.
How deep would a correction be? I really don’t know, and that is the data element I am most anxious to determine. It will tell us a lot about the significance of the bear market low set in March.
Here are the facts – the truth and nothing but the truth:
Regardless of how it came about, via intervention or genuine investor confidence, the market has indeed set a strong intermediate advance in the last seven weeks, even though still closing in April below the highs of the year.
But there is still a left translation in place, i.e., a pattern of lower highs and lower lows, in the broader market – as seen in the chart above for the S&P 500.
The economic data, and not the vaunted “better than expected” spin, simply do not support the level of advance we have just seen. A serious look at the data should convince any of you that the economy is still in the tank and will stay there for some time going forward.
So what do investors do going forward?
Eventually, possibly as soon as next week, the reality of the economic condition will force speculating growth traders to admit that they are looking a little too far forward. And the end result will be some selling, taking prices back down.
But back down to where? (Boy that question comes up a lot).
My suspicion is that the March lows were allowed to occur or possibly even engineered by market makers to set a significant low that could be promoted as “THE” bear market low. You see, once a low is in it is all uphill from that point.
The reason I say this is because the real hard decline below the November lows was accomplished in 5-6 days. And the immediate advance from that new low mysteriously took place in only 2-3 days. Outside of those7-9 days the market has traded in a range. For the S&P 500 this range is 750-950, with a spurt to 1000 in early November.
I think that regardless of whether intervention has been used to create a bear market low and a new bullish advance, there is something significant that we can gain from the recent violent price decline and advance.
Because the reality of the economy is not in step with the strong rally and positive spin, prices will eventually retreat. And here is where the “engineered bottom” may become a benefit.
There is a good chance that the November lows have now become the bottom of a sideways trading channel that prices will oscillate in until the economic condition begins to catch up with the forward looking stock market. Therefore, we could expect a correction to be near the lows of January (around 800) or the lows of November (around 750).
As long as the reality of the economy is so divergent from the hopeful advances we have seen in the stock market, the highs going forward are going to reach serious resistance at the November highs (around 1000) and possibly at the January highs (around 950).
A likely sideways trading channel (that may have been engineered or might have developed on its own) looks to be in development. This will prove itself out over the remainder of the year. If it plays out, as I suspect it might, then this developing sideways channel provides us a good background for making investment decisions.
Right now, the probability for sideways movement or a pull back is higher than the probability for a strong advance during the next several weeks.
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