Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
First we’ll go to the technicals. Back in mid April I had opined a ‘bear flag’ formation was being created. [Apr 17, 2012: Potential Bear Flag Forming] But the market being the difficult beast it is, head faked everyone and rather than a break down from said flag it first went UP and nearly touched yearly highs. This caused everyone to think the bear flag had failed…. only to lead to a horrid May in the market. Generally a bear flag will resolve relatively quickly but the longer that one lasted the more doubt it created and potentially transitioned into a market that was creating a new range before a new move up. Hence, why it was so tricky.
I speak of this only because we potentially are forming a new bear flag. After extreme oversold conditions the markets finally held a previous low Monday and rallied. This had been expected for a few days but anyone trying to catch the knife last week had their fingers chopped off… repeatedly. We had mentioned a potential bounce level to 1338 minimum [May 22, 2012: Market Bounce Arrives – How Durable?] but as of Tuesday mid day the rally only hit 1328 as it was rejected by the quickly falling 10 day moving average. Then yesterday started horribly as news surfaced that discussions / preparations for a Greek exit from the EU are formally starting behind the scenes, and it really looked like the bears would take charge. Instead it was a trap, as rumors out of Europe that (a) Merkel supports backstopping all EU bank deposits (b) Italy and France support Eurobonds [May 22, 2012: Are Eurobonds Coming?] and/or (c) pick your rumor, hit.
The larger picture is this environment is akin to summer 2010 and latter 2011 where headline rumors, European comments, intervention hopes dominate the landscape and the market is herked and jerked around while in a downward path. The action is violent in sharp contrast to January and February of this year. Stocks are moving en masse as correlations return, and individual stock picking is nearly useless again. Meanwhile the safe havens – the U.S. dollar and Treasury bonds, surge. Therefore, unless you know the rumor/intervention hope of the day ahead of time it’s really not a place anyone with intermediate term views is going to risk a lot of capital.
Speaking of the bear flag, yesterday’s sharp rally to take markets out of steep losses to very modest gains helps define a current potential bear flag range of about 50 points: S&P 1290 to 1340. While we did not reach the 1338 in the S&P 500 I am still going to include that in the range as that is a multi month resistance/support level the market has been dealing with throughout the year. So just as I said in mid April what happens WITHIN that range means nothing. The market could be UP 25 S&P points or DOWN the same, but as long as it’s within that range it is only a basing activity and nothing but “white noise”. And until further notice it is has the potential of a new bear flag forming. Of course we sit almost smack dab in the middle of said range today.
If you turn this chart upside down you would call this very bullish…. we’d be saying after a large move up, the market is going sideways for a few days to digest the move. Hence, it is only fair to lean bearish when we have the inverse situation. The market can always differ and change things – technicals are only a roadmap and in a world of massive intervention they can quickly be obliterated as said roadmap. So if we hear that to stop bank runs every single cent of bank deposit in the Eurozone will be backstopped by the ECB or “Germany” (with what money???) you will get a ‘face ripper’ type rally I am sure. You can see that from yesterday where nothing but rumors got the Dow up 200 points from the low. We repeat the same pattern year after year now, downfall, bad news, crisis, intervention, rally. Rinse, wash, repeat.
As for economic news overnight – it continues bad. China continues to weaken, but I think commodities have been telling us this for months. Expect more easing in the future although they cut reserve requirements 50bps a week and a half ago. And Europe data is also very weak, but this should come to no surprise to anyone. I think some/much of this is ‘priced in’ the market but the mess that is the Eurozone remains the key issue. Everyone awaits the authorities to swoop in and “fix it” (kick the can). My thesis that QE3 is arriving has not changed since last fall, and is only being strengthened by the day. In fact we might get coordinated global central bank action since the level of worries are global – we’ll see in a few weeks.
- The euro zone composite PMI, a combination of the services and manufacturing sectors and seen as a guide to growth, fell to 45.9 this month from April’s 46.7, its lowest reading since June 2009 and its ninth month below the 50-mark that divides growth from contraction.
- Markit, which complies the PMIs, or purchasing managers indexes, said the reading was consistent with gross domestic product, which stagnated in the first quarter, falling by at least 0.5 percent across the region in the current quarter.
- “The flash PMI figures for May look horrible and provide a clear warning that euro zone GDP will almost certainly show a contraction in Q2 after stagnating in Q1,” said Martin van Vliet at ING.
- Across the channel, official data showed Britain’s economy shrank more than first thought between January and March, after the deepest fall in construction output in three years, while government spending made the biggest contribution to growth.
- PMI data from Germany, Europe’s largest economy, showed its manufacturing sector contracted at a far greater pace than was expected, and its service sector saw minimal growth. In neighboring France, both sectors contracted faster than predicted by most economists.
- German business sentiment also dropped for the first time in seven months in May, the Ifo think tank said, missing even the most conservative forecasts, in a sign that Europe’s largest economy is vulnerable to euro zone turmoil despite holding up well until now.
- HSBC’s Flash China PMI, the earliest indicator of China’s industrial sector, retreated to 48.7 in May from a final reading of 49.3 in April. It marked the seventh straight month that the index has been below 50. “The series of highly disappointing April activity data – exports, imports, industrial production and retail sales indicators all fell short of even the most pessimistic forecasts – the first gauge for economic activity in the current month is a further signal that internal and external headwinds are still biting into economic momentum,” said Nikolaus Keis at UniCredit.
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