Wednesday, June 16, 2010

Give Props to the Technicians ...

Well, S&P 500 did not break below the 1,050 level, and in turn, literally burst through the 200-day average of 1,108.25, which as displayed by the market, convinced technicians to make that 180 degree turn from bearish to bullish ... at least for the day. As we mentioned last week, continuance of the latest downturn or correction would take place if S&P 500 had gone below 1,050, which of course did not occur. At the same time, the latest downturn short-term partial recovery did strengthen the 1,050 base level.

If the market turned upward and excluding significant downward movements, the 200-day average is likely to trend further upwards and maintain such a trend. This is mainly due to the fact that the market experienced a big upturn, 18%+, since late August '09 until late April '10. The turn of the 200-day average could drive similar change of direction in the 50-day average at least through the next 2-3 weeks, which do include the April highs. So, at least in the short term, from a technical standpoint, the market appears to be leaning more towards the bullish side.

So technicians may be looking for the 10-day to cross the 200-day on the upside, or the 200-day crossing the 50-day on the upside. The downturn and/or bearish mentality may conquer the market again, if the faster declining 50-day crosses the flat 200-day.

As usual, we believe the fundamentals tell a different story. With many upcoming key economic indicators, the battle is now between technicians and the other more fundamental-based traders, meaning volatility may be around the corner.

For the rest of this week, some potentially disappointing economic indicators include May housing starts and building permits (due out tomorrow morning).  The end of the latest home buying incentives has very likely driven down demand for not only buyers but also the builders.

Capacity utilization will likely be positive or better than expected, but not at a level demonstrating strong expansion or instigating inflation fears.

We look for initial claims to be in-line with the 450k current estimate. In addition, although the total continuing claims may be lower (likely around 4.5MM), we recommend for everyone to view the Extended Benefits and the EUC 2008 (Emergency Unemployment Compensation) figures in the weekly initial claims report. The decline in continuing claims, we believe, is more likely due to the 26-week expiration of benefits for many unemployed. Yes, a small, very small portion may be due to some job findings, but after the 26 weeks are over and the initial continuing benefits run out, those unemployed are no longer included in the continuing claims figure. For this reason, again, we believe many should view the Extended Benefits and EUC 2008 numbers, which together, will likely be higher than the prior week. All in all, the current burst in government hiring may have helped to slightly, only slightly, ease the lingering unemployment fears. But once the Census project is finalized, we don’t expect the majority of Census workers to find FT jobs.

Lastly, the Leading Indicators figure could be in-line or worse than expectations, negatively impacted mainly by the 9%+ drop in stock market values during the month of May.

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