Will They Buy the Dip on Monday?

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After two high volume distribution (selling) days this week alone, the question at the front of my mind this weekend is, “will they buy the dip on Monday?” 

Ever since the January-February correction, every pullback has been shallow and immediately bought into, pushing the indexes higher, and so after two big dips this week, Monday should be interesting.  What’s particularly attention-grabbing is that Friday’s close was extremely ugly with no buyers to be found as the clock wound down towards the end of the trading week with the S&P 500 closing at the day’s lows. 

We had a good week and a good day on Friday, as our inverse ETF positions and SPY put option performed well through the market turbulence.  Our outstanding performers of the day were our position in VXX, the iPath VIX Short Term Futures ETF that tracks the VIX index, gaining +7.9% on the day and the SPY put climbing +21.4%.   

We remain in the “Red Flag” mode, expecting lower prices ahead. 

Looking at My Screens 

As we’ve been discussing for sometime, the markets were overdue for a correction as they were heavily overbought and bullish sentiment has been running at historically high levels. 

A look at the S&P 500 chart tells the story: 

 

Chart courtesy of www.stockcharts.com 

You can see in the top display how the RSI has dropped to more mid-level from its lofty perch above 70 and so some of the heat is out of the market for now. 

The bad news is that the 20 Day Moving Average which was the first level of support was decisively breached as was the all important 1200 level of support. 

Next significant support is around 1170 and the 50 Day Moving Average at 1165, while at the bottom of the screen, we can see MACD accelerating its downward slope on a “sell” signal. 

My proprietary long/short indicator still indicates a “sell” and the other short term indicators I watch like the Advance/Decline line, % above 50 Day Moving Average and NYSE Bullish Percent Indicators all show growing weakness and so it would appear that we could be in a short term correction within what is still a longer term uptrend. 

The View from 35,000 Feet

This week the domestic news was mostly good while the international news was mostly horrible. 

At home, the Case/Shiller housing index, Consumer Confidence, Chicago Purchasing Manager’s Index and Michigan Consumer Sentiment gauges all pointed to improving economic conditions. 

The 1st Quarter GDP number came in a +3.2% which was less than expected and substantially below what could be considered “normal” after a deep recession and that points to a not very robust recovery ahead. 

The other potential canary in the coal mine was a report published in Reuter’s regarding global growth.   

On Friday, Reuter’s reported that The Economic Cycle Research Institute said that its Weekly Leading Index rose to almost a two year high for the week ended April 23, but that the annualized growth rate fell to a 38 week low of 12.4% which is the lowest since July 31, 2009.   

Reuter’s went on to say,  "With WLI growth declining to a 38-week low, overall U.S. economic growth will soon begin to ease, in line with the downshift in GDP growth shown in this morning's data," said Lakshman Achuthan, managing director of ECRI.” 

This is not the stuff that economic recoveries and stock market rallies are made of. 

Overseas, the Greek Tragedy/Drama/Comedy continued to play out and appears to be reaching a climax sometime within the next two weeks when the fat lady will sing, one tune or another. 

The week’s events were truly dramatic as Greece, Spain and Portugal were all downgraded by major ratings agencies and the bailout deal soared from 50 Billion Euros to more than 150 Billion Euros.

So the deal has gotten more expensive and with the U.S. being the leading player in the IMF, we’ll be getting the opportunity to bail out the Greeks and the European banks holding their junk debt. 

Nobody likes the deal with 60% of Germans opposed and 60% of Greeks not wanting to bite the bullet with the austerity measures they feel are being crammed down their throats.  So there are strikes and demonstrations and some observers think the situation could even descend into civil war as there has been a steady run on the banks in Greece and a majority of the population wants to leave the Euro. 

Things aren’t much happier in Germany where the primary opposition party, the Social Democrats, oppose the plan and most parliaments in Europe have to approve terms of bailout to be announced this weekend. 

So this will be an exciting week as the bailout plan is ratified (or not?) and the battling goes on within the European Union. 

I suspect Greece will be saved but I have to ask, “so what?” and if the markets ask the same question, we could be in for some rough water ahead. 

I say “so what?” because as a friend of mine told me last week, “Greece is small potatoes.”  And he’s right.  But Spain and the rest of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are not.   

The PIIGS are a huge monster that could devour a slew of European banks as well as even overwhelm the IMF, which seems hard to believe but certainly possible, because the European banks are on the hook for more than $1 Trillion between Greece, Portugal and Spain, with Spain being the elephant in the room at $840 Billion. 

So what happens when Spain’s debt comes due starting in July?  And Portugal?  Ireland?  Italy?  You get the picture and the picture could get extraordinarily ugly if these dominoes start to fall. 

What It All Means

The bottom line here is more uncertainty and volatility ahead.   

If the European Union can put out the forest fire sweeping the Continent, we could see some stability return to global markets.  However, if there’s one hiccup along the way over the next two weeks or if Greece misses its May 19th deadline or restructures its debt, the flames will be fanned to new heights. 

 The other potential nuclear blast comes if global markets wake up to the overall liabilities in the Eurozone because, in that case, there won’t be a Euro to be found to roll over all the debt coming due this year.  That rush to the exits could lead to another financial meltdown similar to what we lived through with the collapse of Bear Sterns, AIG, Lehman Brothers, etc. 

You really couldn’t make this stuff up. 

The Week Ahead 

This will be a giant week for economic reports with the Big Kahuna on Friday when the April Non Farm Payrolls report comes o out at 8:30 a.m. Eastern Time. 

Economic Reports: 

Monday: March Personal Spending, March Personal Income, March Construction Spending, April ISM Index, April Car Sales 

Tuesday: March Factory Orders, March Pending Home Sales 

Wednesday: ADP Employment Report, April ISM Services 

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims 

Friday: April Non Farm Payroll Report

 Sector Spotlight: 

Leaders: Gold, Treasuries 

Laggards: Natural Gas, Oil, Italy 

Spring is coming late to my home in Bend, Oregon, with the temperature in the mid 40s and it was still snowing in the Cascades as I drove over Santiam Pass last Wednesday.  Someone from the Weather Channel needs to drop a clue that it’s May Day which began in ancient times with the festival of Flora, the Roman Goddess of Flowers and in more recent times with dances around the Maypole. 

Wishing you a great weekend and that it’s warmer wherever you may be,

 John

John Nyaradi                              To get a Complimentary Special Report from Wall Street Sector Selector, click here:

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Posted 05-01-2010 8:50 PM by John Nyaradi