Week’s Economic Indicators Key

Brooksie’s Daily Stock Market blog

Monday, August 15, 2011    9:14 am EDT

DJIA: 11,269.31         S&P 500: 1178.81

I wasn’t overly impressed with Friday’s  125-point gain in the DJIA, primarily because 7 of the 30 Dow stocks accounted for 85% of the gain. What’s more,  percentage gains in the S&P, Nasdaq and Russell 2000  were half that of the Dow.

This is a fragile rebound. One slip and we will test last  week’s lows (DJIA: 10,588,  S&P 500: 1101.54).

While the potential unraveling of Europe’s complex finances still hold center stage, the U.S. economy runs a close second.

With mounting fear of a U.S. recession, this week’s economic indicators could be the swing factor in whether the market will rebound or plunge sharply. The Empire State Manufacturing Survey came in sharply lower than expected today.  Housing Starts and Industrial Production come tomorrow.  Wednesday: Producer Price Index. Thursday: Jobless Claims, Existing Home Sales, Consumer Prices the Philly Fed (area business)Survey and the Conference Board’s Index of Leading Indicators.

Since  the Street is leaning toward a looming recession, pronounced weakness means another plunge in
the stock market.

What is not expected is stability, what’s more,  firmness in the reports.

The Quants are back !  Remember the “flash crashes” last summer ?  High frequency trading (HFT) is the villain.

An estimated 80% of the HFT trading is concentrated on 20% of the big-name stocks, which have a major and distorting  impact on the market averages.

Defenders of HFT claim their warp speed computer trades provide liquidity for  the market.

Beg pardon, but how can extreme, split-second,  irrational swings in the market be called “liquidity ?”

One of the most appropriate features in the 2011 Stock Trader’s Almanac*  was, “Pre-Presidential Election Years – No Losers in 72 Years.”

Hard to believe ?

Absolutely.

Will this year be the first exception since 1939 ?  To keep the unbroken streak alive the DJIA must close above 11,577 and the S&P 500 above 1257 by year-end.

The Almanac reasons that this phenom is directly related to the 4-year presidential election cycle. It notes that most bear markets take place in the first and second year after a president is elected or re-elected when administrations address unpleasant issues freeing up the pre-election and election years for promo by the party in power to retain the office.

Even with its October 1987 meltdown, the Dow and S&P were able to post a gain, though modest (2%)gain.

While the DJIA 10,700 – 10,830 area was my downside target since early June, I  indicated on August 1, that level may not hold and a drop to DJIA 9,680 (S&P 500 1050) follow with a bottom in September/October.   It all depends on Europe and the U.S. Economy.

Today: Easy does it!  Not much is expected from the  meeting in Brussels today.  Friday’s  move up will be hard pressed to rise beyond DJIA: 11,495 (S&P 500: 1209) without big news out of Europe and/or this week’s reports on the economy, and that’s a stretch.  There is a even chance of a one-day reversal to the downside today.

George Brooks

The writer of Brooksie’s Daily Stock Market blog, 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.