Thursday, May 26, 2011

Five Day Vacations

Judging from the action in this somewhat lifeless market, I'd assume many of the big boys have embarked out early this week and are enjoying a 5 day vacation.   Last week we were 'ping ponging' between 1330 and 1340 on the S&P 500.  We opened this week in not so fine fashion, breaking the floor of support, and this week the market is 'ping ponging' between 1312 (April's gap down) and 1325.  Very narrow ranges of 10-12 points each week.

Yesterday's rally ended with a thud as the market surged late in the afternoon only to suffer some quite heavy selling in the closing 20+ minutes.  We remain quite oversold in the near term - enough to make a bear wary, but as I said yesterday I don't expect any great shakes to the upside either.  Much like one looks for basing action in an upside move, this sort of looks like basing action in a downward move.

If the intraday lows of the past 4 days finally do break, a quick move to that 100 day moving average looks to be the next step but with no volume in this market, I'd expect more ho hum action after a bounce there.

On a related note, the 20 day moving average is quickly approaching the 50 day - about 5 points separate the two.  The 20 day has not been below the 50 day since mid September.  It would be another bearish signal if that happened.  (the opposite also holds true - when the 20 day broke over the 50 day mid September we had a two quarter long rally ensue)


In economic news, weekly claims remain elevated over 400K yet again as the long awaited jobs recovery remains "right around the corner".  GDP Q1 second revision was a disappointing 1.8% despite record federal govt spending (10% annual deficit), QE2, payroll tax cuts of 2%, 1 in 10 households who live in a home not making a mortgage payment (hence have lots more money to pay off credit cards and shop), 1 in 7 on food stamps, and record amount of personal income (nearly 20%) derived from transfer payments. 

It remains scary to think what the economy looks like without 18 IVs attached pumping steroids into every vein.  We're now nearly 2 years into the 'recovery' and it's almost entirely China and US deficit spending driven. I don't expect Q2 GDP to show much better than Q1 - and I'd argue U.S. GDP is overstated, since inflation figures are understated.  The economy continues to be "meh", but corporate profits continue to be solid as the labor force is squeezed.  Which to come full circle, is part of the reason we have so many government programs running to substitute for the catalysts that should be occurring in an organically healthy economy where labor and capital are far more in balance.

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