07/08/09   Support & Resistance: Not Just For Eggheads Any More

Editor’s Corner

Support & Resistance: Not Just For Eggheads Any More

Ron Rowland

The stock market is now back where it was at the beginning of May.  All the gains of May and June are gone.  Trend indicators are also bearish: the 200-day moving averages are pointed down and the S&P 500, Dow Industrials, and Nasdaq Composite all crossed below their 50-day moving averages in the last week.  Not a bullish picture, any way you look at it.

It gets worse.  The S&P 500 last closed over the 1,000 level in early November 2008.  While it has not exactly been all downhill since then, a four-digit index value now seems like a distant memory to many traders.  Resistance at the 950-960 area hasn’t been surpassed in eight months.  The 666 low in March has also held, leaving a very wide trading range for such a short time period.  On a shorter-term basis, the 880 mark has been important for the last few months.  Today, the S&P 500 broke to the downside of that level and further losses seem likely.  Next support lies around 820-830, so we could be in for a bumpy ride.  A re-test of the March low before summer ends is not out of the question.

Heard anyone talk about “green shoots” lately?  We haven’t either; those voices are suddenly very quiet.  In June the number of unemployed Americans jumped to 14.7 million, plus 8.7 million “marginally employed,” which leaves the broad measure of unemployment at a staggering 16.5%.  We think it is safe to say none of these people intend to buy new homes, and most have probably cut back their spending to whatever they consider essential.  Moreover, the average work week is down to 33 hours, the lowest since 1964.  This indicates that even those who are still nominally “employed” are suffering from furloughs, reduced overtime, and other cost-cutting measures.  The best-case interpretation of this data is that any recovery will be slow, grinding, and jobless for a very long time.  The worst-case interpretation is… much worse.

Not surprisingly, second quarter corporate earnings forecasts are very low.  Expense reduction will only carry a company so far; eventually every business needs revenue growth, of which very little is on the horizon.  We will learn by the end of this month how accurate the analysts have been in setting expectations.  Positive surprises could mean a few rallies, but we would expect them to be quick and of limited magnitude.

Like the stock market, the ten-year Treasury yield is almost back where it was at the beginning of May.  Today may turn out to be an important breakdown in yields – or a breakout in bond values, if you like to look at it from the bright side.  Today’s auction went well as lower commodity prices and the declining stock market sparked buying in U.S. debt instruments.  The Japanese Yen made a huge jump today, its biggest in seven months.  Since the Yen has lately become a popular bet against global economic recovery, the sudden rally is not a good sign.

Sectors

Two weeks ago we said that half the sectors could flip to red within a week.  Our timing was off, as it actually took two weeks for this to happen.  Technology is still on top, although its momentum is fading rapidly.  Health Care is hanging in there, trying to buck the short-term trend but is having trouble making any progress at this point.  Consumer Staples was the only sector to actually gain momentum in the last week as general market weakness sparked the normal rotation into defensive sectors.  For the same reason, Utilities held on to the #4 spot for another week.  Energy is still in last place as the crude oil sell-off continued.

Styles

We have been pointing out for some time that this market prefers growth over value, so it should come as no surprise that the first three style categories to slip into negative momentum territory were Large Cap Value, Small Cap Value, and Mid Cap Value.  The three Growth categories are not far behind, however, and at this rate will be in the red themselves by our next report.  On a relative basis, Small Cap Growth and Micro Cap are still on top of the chart.

International

Our Global rankings have not yet seen any categories turn negative, but the U.S. and World Equity are both sitting on zero while the European Union is registering just slightly positive.  China and Emerging Markets are still on top for now, though they too are feeling the effect of the broad market pullback.  Japan moved up the ranks to #3, not because it is any stronger than anyone else but because it has been less weak than other markets.  The Yen rally, discussed above, should help offset market declines for dollar-based investments in Japan.


Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“If all the economists in the world were laid end to end, they still wouldn’t reach a conclusion.”

George Bernard Shaw (1856-1950)


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