Weak Technicals Forecasts Drop

George Brooks |

“A punch to the gut” was how economist Austan Goolsbee described the Employment Situation report today on CNBC. The report came in at 88,000 new hires vs. a projected 200,000. He added, the drop may be related to the sequester.
As a result, the market averages in pre-market trading plunged with the potential for a DJIA open well in excess of a minus 140 points.
This all was forecast over the past 10 days by a deterioration in the technicals underlying the market averages.
“SELL IN MAY and GO AWAY”

Put another way, there is a consistent seasonal pattern for the stock market to perform well between November 1 and May 1, and to underperform between May 1 and November 1.*
There are exceptions to this “rule,” but its consistency deserves respect. Obviously, it didn’t work in 2009, because the bull market was gaining a full head of steam, starting in early March. While the market may not do poorly throughout the entire six months (May –Nov.), a sharp correction in the interim is almost certain to occur as it has in the last three years, all starting in May.
Based on the deterioration in the technicals, the slump could come early this year.
TODAY: Down in the first 40 minutes of trading to DJIA 14,395 (S&P 500: 1,538), a rally to 14,465 (S&P 500: 1,545), then a close around the level hit in early trading.
This is a real test for the bulls. Will they pounce on this sharp drop in prices ? Or, will the wait to re-think their strategy.
Investor’s first read – an edge before the open
DJIA: 14,606.11
S&P 500: 1,559.98
Nasdaq Comp.: 3,224.98
Russell 2000: 925.66
Friday, April 5, 2013 (9:07 a. m.)
WHY THE MARKET HAS HELD UP BEFORE THIS:
Intraday volatility in recent weeks has been extraordinary – huge swings in the otherwise orderly market averages.
As I see it, this reflects aggressive selling, but concurrently, aggressive buying.
The source of the selling is profit taking, by investors who feel certain stocks have maxed their gain and are switching to better opportunities. Then too, there are investors who expect a correction and don’t want to give back gains or take bigger losses in under-performing stocks.
The buyers are money managers who have no other alternative. Clients have given them money to invest for a better return than t-bills, money markets, etc.. If they don’t work it, the client will find someone who will.
What’s more, the individual investor is finally returning to the market –late as usual.
Hedge Funds and hot money only increase the magnitude of these irrational swings in the market.
Based on the deterioration in the technicals underlying the market, we should already have had a sharp correction.
There have been just too many investors ready to use any pullback in prices to buy.
As long as the market stays at this level, selling will continue. However, if the intensity of the buying eases for just a week or so, that’s when we will get a correction
SEQUESTER: I’m keeping this posted so you don’t forget the market may begin to worry about its impact.
This week will feature some key economic reports (see below). At some point, the question will be raised about the sequester’s impact on the economy, notwithstanding the uncertainty it brings to persons at risk, directly and indirectly.
It is too early to expect anything to show up in the indicators, and it may never be a major issue if our economic recovery gains traction.
It is one of those potential negatives one has to consider along with other ingredients that lead to a decision to buy or sell.
Employers (government or private) may opt to furlough employees without pay, cut back on hours rather than release them to unemployment at the expense of the government. Even so, several weeks without pay has an impact on the economy.
This is one of those uncertainties that, along with a few others, can trigger a consolidation or pullback in the stock market.
Apple (AAPL: $427.72)
Yesterday was the 8th day in a row AAPL closed close to its low for the day. It has posted lower daily highs in the last 7 days - not a good sign. It hit a wall at $435 yesterday resistance at the open, then spent the rest of the day under selling pressure, hitting a low for the day at $425.25. It looks like it will test the March 4 low of $419. A break below that counts to $385 - $398.
Technically, the pattern is ugly, but this company is a leader in a dynamic industry and is down 39% from its September high of $705. At some point the BIG money will see irresistible value. Most likely, these big hitters would like to see a flush to $385, and they could get that, unless others step in ahead of them.
Currently, the Street is concerned about its product refresh cycle, criticism by the Chinese government and its legal battles with Samsung. However, it acts as if something else is spooking buyers.
I am not long or short AAPL.
FACEBOOK (FB - $27.72)
FB’s strong neutral has turned to a positive, as FB responded to news about its new “Home” on Android gadgets yesterday with a solid gain on big volume. Support now rises to $26.66; resistance starts at $27.70.
Where did the selling come from between March 7 and Tuesday ?
Possibly from IPO investors whose shares came out of lock-up, the latest being 777 million shares freed up in mid-November. .
That would be good news, since no one can blame them from raising cash for other purposes, even if they could get a higher price in the future. If they genuinely feel the stock is not worth the mid-20s, FB’s stock has a problem.
Between Aug. and Dec. last year, a trading range between$18 and $24 developed. That should provide support for FB and a buying opportunity. That’s where a three month tug of war took place between the believers and non-believers.
I am not long or short Facebook.
ECONOMY:
This will be a heavy week for economic reports.
But the Street is heartened by favorable economic data on employment, personal income, consumer sentiment, auto sales construction spending, durable goods manufacturing, and housing.
I am going to list the economic reports below but will not include the numbers from the last report, since those numbers are often revised significantly and therefore are potentially misleading.
I strongly urge you to access the website: www.mam.econoday.com for detailed reports on this week’s calendar and an excellent recap (plus graphs) of last week’s reports. The site does a great job graphically illustrating key indicators.
THURSDAY:
Jobless Claims (8:30)
FRIDAY:
Employment Situation Report (8:30)
International Trade (8:30)
Consumer Credit (3:00 p.m.)
*Stock Trader’s Almanac
George Brooks
“Investor’s first read – an edge before the open”
sensiblesleuth@gmail.com

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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.

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