While we’ve had a good amount of economic data points out this week likely the most watched print is out tomorrow (Friday) morning: the May employment report. Meanwhile we remain in an environment that is littered with headlines and rumors, any of which can quickly move major stock indices 1%.
Monetary policy hawks and doves are all over the place with their forecasts and expectations but the Federal Reserve and the ECB continue to reiterate their supportive stands. That leaves equity bulls hopeful for further accomodative news potentially announced at the June FOMC meeting (June 19-20).
Today marks the end of May and with the first of the month tomorrow coinciding with jobs-report-Friday things have the potential to get that much more interesting.
U.S. equities are largely trading in a range. The range for the S&P 500 remains 1290ish – 1340 and any move outside that zone needs to be assessed once it happens. Last week’s trading was choppy and really only playable for very quick hitters. For the summer months I foresee continued chop, again best played in the very short term time horizons as swing trades are subject to large overnight gaps on aforementioned rumors.
Almost always when the S&P 500 comes close to its 200 day simple moving average (red line) it eventually touches it or breaks below/above it. Last week the index got very close to the 200 sma…
Small cap stocks as measured by the Russell 2000 are consolidating their recent weakness just near the 200 day moving average and have resistance near 785, which is the neckline of the head and shoulders pattern in play…which works to 730. It is likely that the trend will continue lower in time and take the RUT below the 200 sma, but that could be a choppy ride and again in my opinion best played in quick time frames unless one is comfortable with wide stops.
Many have asked me why I don’t think we have seen the lows in equities. The answer lies within the chart below. Most important bottoms show divergence of price and oscillators. Last week’s lows came coincided with the lows in oscillators…so no divergence. This is not to be overlooked.
I continue to think 1340ish – 1360 or so may be where the oversold bounce ends but don’t have any skin on that trade at the very moment.
The semiconductors too continue to look weak and with the SOX as a leading indicator trading below its 200 sma it doesn’t spell much upside potential for stocks until that changes.
Over in Europe equity indices hardly bounced last week and are already on their way lower again – ‘aint no sunshine when it rains.’ See the chart of the Eurostoxx 50 index below.
In the world of credit and rates note that the CDX investment grade credit index has risen 30% since the equity top in April (see chart below). In other news German two year notes are yielding nothing (literally) quite possibly making the U.S. 2 year note at 26 basis points ‘attractive.’
All in all we remain in a risk off environment that has many bulls who were loudest in the spring rethink their strategy. Seeing things for what they are rather than what I wish for is my strategy.
Pick your spots and always use stops.