We
have talked in the past about the tendency for
stocks to reverse the market action of not only FOMC
meeting reactions, but also the reaction created by
the jobs report - in the days that follow. In
the four trading days prior to yesterday's action
we've seen rallies off of both of those events.
This was a little more than just a reversal of that
action.
I don't want to try to dissect whether the economy
is slowing too quickly or if inflation is getting out
of control, but yesterday's same-store sales retail report for April was very weak, including
Wal-Mart's 3.5% drop, its steepest monthly decline
in 28 years. That seemed to have been the
excuse for some to take profits - and why not?
There are a lot of profits to protect for those who
were [smart, aggressive, lucky - pick your choice]
enough to make money during the rally.
The weak sales report helped bonds (F fund) bounce
back a little from Wednesday's drop, but today's PPI
(Producer Price Index) could shake things up again
as we get another gauge at what is happening on the
inflation front. Estimates are in the 0.6% to
0.7% range, and 0.2% for the Core PPI.
Looking at yesterday's drop, which broke below some
solid resistance, was not all that bad considering.
Not to say it won't get worse. I marked two past instances where short-term
support
was broken. Point A below was back in
November. That rally's support was broken but the
market quickly resumed the upward action, although
the angle of the incline was slightly changed.
At point B the S&P broke support but didn't stop
there. The decline only lasted a couple of
weeks but it was a very quick 6% drop before it was over.
Chart provided courtesy of
www.decisionpoint.com
On the weekly chart, the S&P 500 has pulled back
after hitting the upper end of the trading channel. It doesn't mean the
market has to go down. It could just continue
to ride up that upper end of the trading channel as it did in
late 2006 / early 2007. But how nice would it
be to see a sell-off to the lower end? That
would be a golden opportunity.
Chart provided courtesy of
www.decisionpoint.com
Going back to point B on the top chart, do you
recall what ignited the sell-off last February?
It was the 10% drop in China's Shanghai Index.
I mentioned this a couple of weeks ago but look
again at
what has happened since that time. The Index
is up 59%. Can you imagine? That would
be like the Dow going from today's 13,200 to over
21,000... in two months!
If
this Shanghai Index decides to come back down to reality, we
could see a free-fall. What will that do to
our market? Thanks to vectorman on our
message board
for pointing this out to me. Here is an
excerpt the website that is closely monitoring this
action.
"What is
China's Zhou Xiaochuan going to do now?
"Zhou Xiaochuan is the governor
of the People’s Bank of China. Like us, he knows that the Chinese stock
markets are in a bubble and he is very worried about a precipitous
decline. His power on making such comments, comes from the fact, that
in the past, Chinese investors always took the Government's work as
"Gospel".
"In the past, all he had to do
was "issue a public warning" and investors would listen to him. Now,
Chinese investors are ignoring him. He even tried sending out a
wake up call by having 3 major, State run newspapers run headline
stories decreeing his warning on Tuesday. Instead of the market pulling
back, it jumped up 3% in one day.
"That now leaves him only one
option. If they won't listen to
what he says, he will have to initiate some kind of banking/government
action that will force Chinese investors to slow down."
You can read the rest at
http://stocktiming.com/Thursday-DailyMarketUpdate.htm. I
believe this is something to be very concerned about.
Our
TSP Talk Sentiment Survey results are in and yesterday's sell-off
was enough to bring the bull/bear ratio down to the buy signal area.
Trader Fred's
TSP Trader System is still on a sell signal, but for how long? Read Fred's current commentary on
the
system page.
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