Two-Legged Decline Likely Before Stability

George Brooks |

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

Thursday, May 17, 2012        9:15 a.m. ET

DJIA:  12,598.55

S&P 500:   1324.80

Nasdaq Comp.: 2874.04

Russell 2000:  772.11

CONCLUSION:

The persistent weakness in stock prices suggests a two-legged decline before the market stabilizes.

Assuming no change in news, a possible scenario would be  that the first leg down would find support at DJIA 12, 275 (S&P 500: 1292).

A bounce back to 12,610 (S&P 500: 1333)  could then happen depending on the news at the time followed by another leg down with a final bottom around DJIA 11,915 (S&P 500: 1255).

So much depends on the flow of news out of Europe. The market is trying to find a comfort level for what is known now and the possibility Greece will exit the euro.

Presently, I give this scenario a good possibility, but this is a news sensitive market.

I have read  a case for an orderly  Greece exit from the euro and cases warning how big a disaster it would be.

The stock market’s behavior suggests a Greek exit is likely and won’t be pretty.  The adverse impact would worsen as investors then start worrying about which country is next to go –i.e. – risk of contagion.

I would expect the European leaders have prepared for this possibility to the extent possible.

Economic growth is imperative if these countries are grow out of their debt problems, but I don’t see how enough growth can be promoted when recessionary pressures are so overwhelming.  The United States itself  is struggling.

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) –  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.

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) -  Claims were unchanged at 370,000 for the week ended May 12 The 4-week moving average  was down 4,750 to 375,000.

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

Companies

Symbol Name Price Change % Volume
SNFCA Security National Financial Corporation Class A Co 5.50 -0.06 -1.08 4,701

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