Don't Buy the Open - Upside Limited - For Now

George Brooks |

George Brooks Stock MarketBuying a strong open has its risks, one of them being that an investor will end up paying the high for the day and days to come. I see today’s strength as “technical” with potential for follow through.

In coming months, I see burst’s of strength, but no sustained upmove, at least until Congress approves the nation’s debt limit.

Brooksie’s Daily Stock Market blog: An edge before the market opens.

Tuesday, May 31, 2011 9:23 am EDT

DJIA: 12,441.58
S&P 500: 1331.10
Nasdaq Comp.: 2796.86
Russell 2000: 836.26

On Friday, I said a break above 12,450 on the Dow Jones Industrial Average (S&P 500: 1328) called for a move to DJIA 12,550 (S&P 500: 1345) by next Wednesday, assuming no new negatives over the weekend, then be followed by a moderate sell off.

Based on the surge in U.S. stock index futures today, that appears to be what will happen.

The announcement of a EU decision regarding a new aid package for Greece is credited as the catalyst
for investor enthusiasm before the open.

I think this is a normal technical bounce that will run into a wall this week.

We have some overhanging negatives that stand to inhibit a significant advance in stock prices, and especially since the market needs to digest an 8-month advance in the market since late August which drove the DJIA up 30%, S&P 500: +32%, Nasdaq Comp.:+38%, and Russell 2000: +48%*

Compared with the market between late August and May 2, this stands to be a stock pickers’ market, rather than one where most of the more prominent stocks rise together. It will require better timing and higher risk for investors whose buys are poorly timed.

Last Monday the market got hammered by global financial fears as Fitch downgraded Greece’s debt rating, and cut its credit outlook for Belgium and Italy. Adding to the weak opening were soft economic reports from Germany and China.

The stock markets spent the remainder of last week struggling to offset Monday’s losses.

Institutions have used the OOOOOOh

As I see it, the biggest trading opportunity will occur prior to a Congressional approval of a debt level increase accompanied by at least an outline of a plan to address the nation’s rising national debt. This could occur July 29 or August 1, assuming the market does not rise earlier in anticipation of an agreement.

Recently, the Street began to worry about the economy. Is it slowing, if so, how much ?

Shortly after the open we get the Chicago Institute of Supply Management report, which generally reflects business activity in the region. It slowed to 67.6 in April, down from 70.0 in February. Since its surge between late 2008 and March 2010, it has ranged sideways with a dip last summer and recovery in the fall. The report will come at 9:45

Consumer Confidence through early May will be reported at 10 o’clock. It rose 1.6 points in April after a peak in February at 72.0. This is a very volatile index. Three thousand households are surveyed each month by the Conference Board, however there is a questionable correlation between it and consumer spending. Nevertheless a sharp drop would add to current concerns that the economy is easing.

Wednesday may give us a better reading on the economy with the 10 o’clock report from the Institute for Supply Management based on surveys of 300 manufacturing firms encompassing employment, production, new orders, supplier deliveries, export/import orders, backlog, and inventories. While the last report through April 11 reflected some slippage, the pace over the last seven months has been encouraging.

Thursday, we get Jobless Claims and Factory Orders and Friday we get the Employment Situation report and the ISM Non-Manufacturing report.

The stock market is the best indicator of the economy’s short-, intermediate-, and long-term health.

Clearly, that does not mean economic reports won’t impact stock prices, as I believe will be the case now. A few more reports of a softening economy stand to add downside pressure on the market and MAYBE trigger speculation of, you guessed it, a double-dip recession.

I can’t find any justification for that happening now.

George Brooks
sensiblesleuth@gmail.com

*based on intraday prices

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