Stock Pickers' Market - Sluggishness to Persist

George Brooks  |

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

Thursday, May 26, 2011 9:23 am EDT

DJIA: 12,394.66
S&P 500: 1320.47
Nasdaq Comp.: 2761.38
Russell 2000: 820.86

Interesting ! Yesterday, I said I didn’t think it was a good idea for investors to chase rallies in here, that there was no rush to buy stocks and the market needed more time. I also said, a break below 12,300 would call for a drop to 12,300, but noted that “institutions often use the increased volume caused by a break below support levels to do some buying.”

Apparently, that is what happened and it looks like smaller stocks, as represented by the Russell 2000, were the focus of their interest. As expected, the DJIA and S&P 500 both found resistance around 12,425 and 1323 respectively. There was hope Q1 revised GDP would come in at a plus 2% up from the initial 1.8% - didn’t happen. Jobless Claims were a plus 10,000 – not a decision changer.

I expect selective buying, at best, as institutions use lower prices in targeted stocks to buy but not buy aggressively.

We are approaching a three-day weekend, so Friday’s action will likely be subdued. The Stock Trader’s Almanac reminds us that the day after Memorial Day has been up 8 out of the last 11 times, and the first trading day in June 10 out of the last 12. The latter makes sense, since it is the first trading day in Q 3 when institutions can be expected to add stocks to their portfolios they didn’t want investors to see in their quarter-ending reports.

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I still think the market needs more time to settle in after a big September 2010 to May 2011 rise in prices. Then too, May 1 marked the end of the celebrated “Best Six Months” for investing, though in this case it was nine months.

The market is struggling to find a level that fully discounts the negatives it faces. I don’t think they will vanish overnight, ergo volatility and sluggish market action stand to dominate.

On the other hand, today’s negatives aren’t so formidable the market can’t eventually ignore if the outlook 6 to 9 months out starts to look exciting.

The big uncertainty, as I have noted numerous times here is Congressional approval of a higher debt ceiling, usually routine, but a sticking point this time around as Congress ties it to a more definitive plan to address the growth in our nation’s national debt.

A junior U.S. Senator, interviewed on CNBC television today, suggested it wouldn’t be disastrous if Congress does NOT reach a decision on raising the debt limit by its drop dead deadline August 2.

Whoa ! I am a fan of thinking outside the box, but IMHO failure to reach a decision on this issue, something that has been done 60+ times over the last 50 years would do irreparable damage to our markets and to investor confidence abroad. So much of the pricing in securities is based on CONFIDENCE in the present and future and in the case of investing in a country’s securities - TRUST.

This rivals for insanity the critics who were against preventing a full scale depression and meltdown in the stock and bond market in 2008 – 2009, all in the interest of let the market decide.

Right now, I can see moderate swings of 125 Dow points up and down until the middle of next week, then another leg down. Not cast in stone, but factor the possibility into your thinking.

George Brooks

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