Market Coming Back to Earth?

Lack of anything exciting and beyond (or even up to) expectations from the Fed finally brought the market back to earth.  Of course, we would have included the bad economic numbers, but their negative impact on the market have been discounted every year since the Fed started 'helping the economy recover' or basically artificially inflate assets such as equities.  The market also dipped today due to the expectation of rating downgrades of some of US' largest banks.

S&P 500 closed at 1325.51, down more than 2%.  Technically, the support level of 1290 based on the Fibonacci retracement (38.2%) that we mentioned on June 7, remains.  Unfortunately, S&P 500 was not able to remain above the 23.6% Fibonacci retracement which we view as the resistance level.  Combined with the downward trending 50-day EMA being close to going lower than the 10-day EMA, we're looking at the 1310 level of S&P 500 being the short-term critical level.  If the index goes below that before getting back up to the 1340 level, then the 1290 support could be at risk again.  Given how much the market moved up in anticipation of Bernanke's helping hand, the 1290 support which we initially thought might be at risk due to a Bernanke disappointment remains intact.  Of course, overall, the market remains fragile while the economic recovery remains questionable.

A few market-moving events are coming up during the next couple of weeks.  We don't see anything significant due tomorrow, except for market's reaction to the rumored rating downgrades.  It could be a case of sell on the rumor and buy on the news, the opposite of what took place going into the FOMC announcement.  Next week, new home sales, Conference Board's consumer confidence, initial claims, personal income, PCE prices, the Chicago PMI, and the University of Michigan's consumer confidence final reading, all will be released.  Although we expect volatility with all of this news next week, we believe the market will end the week pretty much flat, as it waits for the now even more important June employment data coming up the week after.  More specifically, the BLS will release June's state of employment report on 7/6/12.  And even though we’ve got the 4th of July to celebrate, we still expect to see a lot of volume along with volatility.  Similar to what we said in early May regarding May's employment report, if the June report is very disappointing, then the market could again begin expecting a QE from the Fed, especially given just how much Bernanke emphasized that all options remain on the table.  As to when that expectation begins to be priced in, remains in question.  We will take a wild guess and say that if oil continues to drop, the expectation could become more likely which means it could begin to get priced in as early as mid-July, only a couple of weeks before the next FOMC (scheduled for 7/31 - 8/1).