Investor’s First Read – Brooksie’s Edge Before the Open
Thursday, May 31, 2012 9:15 a.m. ET
S&P 500: 1313.32
Nasdaq Comp.: 2837.36
Russell 2000: 762.56
Again, it is necessary to emphasize that the vitality of economic recoveries depends on the severity of the recession that precedes it. I think the stock market’s huge rebound starting in early March got ahead of the economic recovery, which was labored, at best. We came within a whisker of a global meltdown in 2008, recovery takes time. That explains the economy’s flirting with a double-dip last year and maybe again even this year. Patience !
Yesterday’s post warned to “Beware of Calming Announcements” designed to minimize the crippling domino effect of Greece’s fiscal and economic tailspin and Spain’s efforts to avoid default.
Reassuring announcements are intended to buy time and calm public panic. While they serve a purpose, they often suck investors into the market prematurely.
No one wants to miss a buying opportunity. “Calming” announcements tend to trigger sharp but brief rallies, just enough to convince unsuspecting investors that it’s time to jump in. When the reality that an announcement was designed to limit the extent of the carnage, not trumpet a solution to prevailing problems, it’s too late – buyers are looking at an ugly loss in the matter of days.
Just be careful.
CONCLUSION: The market is probing for a comfort level where it discounts known and suspected negatives. Three weeks ago I warned of a “greenstick” fracture, that hammer the DJIA down to 12,275 (S&P 500: 1292). Two weeks ago, I said I expected that decline to be a two-legged decline with the first leg bottoming out at those levels. Last week they hit DJIA12,289 and S&P 1291 before rebounding marginally, but barely enough to set up a second leg down, which I projected to end at DJIA 11,915 (S&P 500: 1255).
There is a chance the second leg down IS NOT underway now, that the rebound from the first leg down has further to run, to DJIA 12,785 (S&P 500: 1352). The three economic reports released so far this morning suggest a further slowdown in our economic recovery. The Chicago PMI (regional business activity) report comes at 9:45. Tomorrow’s “Employment Situation” (8:30) and ISM Manufacturing (10 a.m.) reports will be watched for a clue to just how much our economy is slowing.
The Street is hoping that the U.S. economic recovery can continue in face of a slowdown in Europe and Asia.
I just don’t think European leaders will agree to enough of a solution to stabilize their sovereign debt woes near-term. Granted, these issues have demanded action for two years. To their credit, they have made progress, but it looks like meaningful measures meant to convince global markets a meltdown will be avoided will take time.
Presently, I see a major buying opportunity developing in September/October amid a lot of electioneering ugliness.
Facebook (FB) – I’m still seeing 24-26 with a remote outside chance of a panicky drop below 20. We should get a bounce here as shorts scramble to cover. Resistance starts at 29.66. I see Facebook and Zynga (ZNGA) trading actively on CNBC’s ticker. FB derives some 12% ($3.7 bn) of revenues from ZNGA. Could FB be contemplating an acquisition ? Maybe it should.
ECONOMIC REPORTS: One of the biggest worries facing investors is the direction of the U.S. economic recovery. This is a big week for
reports. The more important reports are noted here.
S&P Case Shiller Home Price Index (9:a.m.): Home prices declined 2.6^ vs. a year ago. This is down from February’s year over year decline of 3.5% supporting views that a turn around in housing is at hand.
Consumer Confidence (10 a.m.): Declined for the 3rd straight month bringing the Index for May down to 64.9 from 68.7 in April.
Pending Home Sales (10 a.m.); slumped 5.5% in April after a revised increase of 3.8% in March – big disappointment for those focused on a long-awaited rebound in housing.
ADP Employment Report (8:15 a.m.): New hires in May were 133,000 vs. April’s revised 113,000.
Q1 – GDP (8:30 a.m.) the second estimate for Q1, showed a gain of 1.9% vs. a revised gain for Q1 of 2.2%. Government spending dropped 3.9% contributing to the number.
Jobless Claims (8:30): for the week May 26 increased 10,000 to 383,000 bringing the 4-week average to 374,500.
Chicago PMI (9:45 a.m.): The Index slowed to 56.2 in April from 62.2 in March.
Employment Situation: increased by 115,000 in April after gains of 154,000 in March and 259,000 in February.
ISM Manufacturing Index (10 a.m.): Rose 1.4% in April to 54.8. New orders were ahead to 58.2 from 54.5.
Construction Spending (10 a.m.) rebounded 0.1% in March after a drop of 1.4% in March.
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.