Bulls Need a Hail Mary Pass Here

George Brooks |

Wall Street FinancialsBulls Need Hail Mary Pass

Investor’s first read      - Brooksie’s edge before the open

Monday, May 14, 2012        8:55 a.m. ET

DJIA:  12,855.04

S&P 500:   1357.99

Nasdaq Comp.: 2933.64

Russell 2000:  791.74

Obviously, today will start out on the downside, the question  being,  does this signal another leg down ?

Case against another leg down: We already have had a 4.6%, seven-day correction down to a level (DJIA: 12,700/ S&P 500: 1340) that  spawned sharp rallies in March and April. There is a tendency for downside breakouts to be fake outs prior to sharp rebounds.

Why ?

It is an institutional thing, Big positions are easier to accumulate in face of  the increased volume triggered by downside “breakouts.” Computers are probably programmed  for this.

Clearly, there is nowhere else to invest money in the hope of a return than common stocks.  Money managers compete on performance. Unless they are sure the market is headed significantly lower, they must buy. Obviously, timing is key.

Case for another leg down: Uncertainties are formidable enough to keep investors on the sidelines looking for clarification  out of Europe and from our own economy.  Both have greenstick fractures.

In and of itself, the $2 billion trading loss at JPMorgan Chase is not enough to justify another leg down, but the fact this kind of  blunder can happen today is unnerving.

The real contributors to the market’s vulnerability are uncertainty out of Europe, a slowdown in China, a possible softening in the U.S. economy, a seasonal tendency for the market to underperform from May to November, and U.S. political uncertainty. These are good reasons  defer purchase, even to raise cash..

Just when we all thought it was safe not to worry about Greece, we are now doing just that.  The sovereign debt woes in Greece, Spain, Ireland, Portugal and Italy have exposed the weakness of the whole euro concept and that has to be sorted out before stability is ensured.

I am assuming European leaders are in better shape to deal with  their problems now than a year ago, but there are still “unknowns” they couldn’t anticipate.

An announcement of the formation of a “unity” government in Greece precluding the  need to hold another election would help.

What this market cannot handle now is a sharp deterioration  in U.S. economic indicators.

Uncertainty dominates, Confidence is on the ropes.

TODAY: Odds favor a  drop below DJIA 12,700 and S&P 500: 1347, followed by a rebound.  Reading that rebound is critical. If the market is going to avert another leg down, that rebound must be driven by strong volume.

A “token” rebound to DJIA 12,985 (S&P 500: 1372) and rally failure where the day’s gains are lost,  calls for another leg down, possibly to  DJIA 12,275 (S&P 500: 1295)

ECONOMIC REPORTS

If reports this week show a marked weakening, the market will take a hit. Otherwise it has a chance to stabilize as investors await more clarification.

TUESDAY

Consumer Price Index (8:30) – March was plus 0.3% vs. 0.4% in February.

Retail Sales (8:30) – Up 0.8% in March after a gain of only 0.1% in January.

Empire State Manufacturing Index (8:30)The Index dropped to 6.56 in March from the 20-level in February and January.

Business Inventories (10:00) – Up 0.6% in February against a 0.8% increase in sales resulting in an inventory/sales ratio of 1.28

Housing Market Index (10:00) -  Down 3 points in April after 7 straight gains. The Index is comprised of a survey  covering present sales of new houses, sale of new houses expected over next 6 months, and traffic of prospective buyers in new houses.

WEDNESDAY

Housing Starts (8:30) – dropped 5.8% in March after a drop of 2.8% in February, both multifamily and single-family houses were down.

Industrial Production (9:15) -  Unchanged in March from February. Capacity Utilization down a smidge to 78.6%.

THURSDAY

Jobless Claims (8:30) -  DROPPED 1,000 IN THE May 5 week to 367,000 from a revised 368,000. The 4-week moving average  was 379,000.

Philly Fed Survey (10:00) – The Index was  8.5 in April, down from 12.5 in March.  The New Order Index slipped to 2.7 from 3.3 in March.

Leading Indicators (10:00) – Gained 0.3% in March vs. a gain of 0.7% in February

George  Brooks

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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