Friday, May 15, 2009

Stocks Continue Sliding

It was not a good week for the bulls. After some cooling of momentum and weaker closing action on Monday and Tuesday, we rolled over hard on Wednesday. Nothing much was spared, and many or the recently hot small-caps were pummeled. We had a dead-cat bounce on Thursday and wrapped up the week with another anemic day. The action wasn't terrible, but breadth was soundly negative, and the hot money that has been chasing things was very skittish. I'm not sure how much of this week's weakness was due to the usual options-week machinations.

Technically, the major indices are all starting to roll over. The question is whether they will find some support and bounce back. That has been the pattern for the last 60 days or so, but the selling pressure this week was more severe and the dip-buying much weaker.

When the market starts to roll over like it did this week, it creates overhead, which helps to keep the downward pressure on. Psychologically, the folks who bought recently will start questioning their buying and will have a greater tendency to sell if they can get back to even.

What we saw develop this week was a shift from buying weakness to selling strength. It was a real change in character, and we now are in danger of it developing further.

I think we do have a good chance of developing a rocky trading range in the very near future. There has been a surge in speculative trading in the last few weeks and I think these folks may stick around and continue to look for some opportunities. I don't think it will materialize - see a post from yesterday - but it will be brutal if we roll over again like we did last year and the beginning of this year. Some market players are very frightened of that, and they will lose confidence quickly if the market struggles for long.

The good thing about a trading range is that it rewards active traders and good stock-picking.

Going into more detail, choppy trading in the early going gave way to broad-based selling, which resulted in the stock market's fourth decline this week. As a result, stocks logged a weekly loss of 5.0%, which is its worst in two months... Stocks struggled to find clear direction in the first couple of hours of trading. Participants were generally uninspired by news that the Euro zone economy contracted for its fourth consecutive quarter, and that the pace of that contraction has accelerated. Despite the dour batch of data, European indices closed in mixed fashion... U.S. economic data also did little to motivate. The April Consumer Price Index (CPI) met expectations by coming in flat, while Core CPI saw a stronger increase than had been expected by coming in with a 0.3% monthly increase. Industrial production for April fell 0.5%, which wasn't quite as bad as what had been expected, and capacity utilization came in at 69.1%, moderately better than what was expected... Though the economic readings were generally in-line to slightly better than expected, participants are beginning to look for signs that economic conditions are actually tilting toward growth... News that life insurers will have access to $22 billion in TARP funds initially won support for the group. However, concern that government funds may not win higher ratings for the companies along with the recognition that many companies continue struggling with macro headwinds undercut the group's strength. Life and health insurers finished 3.5% lower... In a similar vein, rating agency Fitch placed several regional banks on Credit Watch Negative amid concern related to further credit deterioration. Regional banks finished the session 3.0% lower... Weakness in insurers and banking issues dragged the financial sector to a 2.5% loss, which was worse than any other sector. With abounding weakness in the financial sector, the broader market was left without one of its primary leaders... Sellers also hit energy stocks with stiff pressure. The sector shed 2.2%. Its weakness was exacerbated by a 3.6% drop in crude oil prices, which settled at $56.52 per barrel... Utilities underperformed for the entire session, extending the prior session's weakness. Electric utilities fell 2.7% amid news that FE held a disappointing rate auction... Retailers showed periodic strength in the wake of better-than-expected earnings from Nordstrom and JCP, but the group still finished 0.7% lower... Tech, which is the largest sector in the S&P 500 by market weight, showed relative strength and actually spent the majority of the session as the only sector in the green. While several large-cap tech stocks held their gains, the broader tech sector was unable to fight off the negative bias and finished 0.1% lower... The broader market did find some support late in the session, but only after it broke below its 20-day moving average to hit 880. Stocks recovered a bit from there, but still finished with broad-based losses as declining issues outnumbered advancers by 3-to-1 in the S&P 500... Options for May expired this session, but that didn't seem to lift trading volume above recent averages. Less than 1.5 billion shares traded hands on the NYSE big board this session...

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