Tuesday, May 15, 2012 9:15 a.m. ET
S&P 500: 1338.35
Nasdaq Comp.: 2902.58
Russell 2000: 778.95
Yesterday’s conclusion was that “Odds favor a drop below JIA 12,700 and S&P 500: 1347, followed by a rebound. Reading that rebound, is critical, I wrote, adding, “If the market is going to avert another leg down, that rebound must be driven by strong volume.”
That is exactly what the market did and the rebound was unimpressive. I also prepared a case for, and against, another leg down
Failure at this key juncture calls for a plunge as far as DJIA 12,275 (S&P 500: 1292). That’s only 3.5% down from here, a very painful 3.5% though. The next support level would be DJIA: 12,075 (S&P 500: 1275). A drop to those levels would be slightly shy of 10% from the May 1 peak, very doable.
We are once again marching to the euro-drumbeat. The euro is down 10 out of the last 11 days vs. the U.S. dollar and Bond yields in troubled countries like Spain and Italy are soaring. There is talk, which is denied, about European governments giving Greece more time to meet budget cut targets and to form some kind of coalition government. There is also talk about preparing for Greece’s exit from the euro.
No one knows for sure how disruptive its exit would be for the rest of Europe. While its economy comprises only 2% of the 17 euro-area’s countries, interest rates in other troubled countries would rise even further if Greece exits or is thrown out.
A favorable result here would buoy stock prices for a day or so. This is one of those situations that has its greatest impact as a negative but less so if it vanishes from Page One headlines.
What’s needed for the market to recover its May losses and go higher ?
Money managers need to be able to see beyond this morass, to expanding economies here and abroad, reasonably free of backbreaking crises. Odds of this happening are fairly good in that our economy has survived a huge test and is in recovery mode.
How long will it take until our economy shifts into second gear is a question mark.
Shifting into second gear is what it would take for money managers to justify paying higher multiple’s of earnings. If they can see this happening 9 months to a year out, they will buy.
Right now, they are only willing to nibble.
TODAY: Greece’s inability to reach an agreement on a reasonable coalition government crushed a potential rally in the stock market. Futures called for a jump of 70 DJIA points at the open until the announcement. DJIA 12,275 likely.
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.
Consumer Price Index (8:30) – Unchanged in April. March was plus 0.3% vs. 0.4% in February.
Retail Sales (8:30) – Up 0.1% in April vs. a gain of 0.7% in March after a gain of only 0.1% in January.
Empire State Manufacturing Index (8:30)The Index jumped to 17.1 from 6.56 in March.
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.
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%.
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
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.