Did the Market Just Top
The market actually closed lower again yesterday. Although neither volume nor the percent of decline was substantial, SPX has struggled mightily against 1377 resistance. Additionally, which I also mentioned yesterday, the selling was more bearish than the percent of the session’s decline suggested.
Over the past few months the small cap and energy areas of the market have been our leaders, but over the past few sessions both of those groups declined heavily. While the broad market has thus far held steady, leadership sectors are crumbling, which is not a good reaction so soon after earnings.
At this point, the market direction is highly dependant on the dollar. Recently, the dollar broke through my “must hold” support level; and went onto lose another 3% following the breakdown from $75. Honestly, I would expect a pause from the decline soon, but until the dollar can rally 3.5% and take back its lost long term support, it is likely to fall much further.
And there is a plethora of news that will considerably impact the dollar this week. The most noteworthy event that will influence the dollar comes tomorrow when England and Eurozone will make interest rate announcements. But today, the EU also bailed out Portugal. The package included over $100 billion and it will be voted on by the EU ministers May 16. Although it seems counterintuitive, since another large bailout like that implies weakness in the Eurozone, it is actually bullish for the euro and bearish for the dollar.
Investors fear that some European nations are stronger than others, and accordingly will be reluctant to help the weaker countries. But as long as those countries continue to be united, the bailouts are considered more a sign of strength rather than economic weakness.
In addition to the news from Europe, a U.S. ADP payroll report showed a less than expected increase in jobs. Payrolls by ADP increased 170,000 in April, which is slightly below the 200,000 estimate, but still an increase. As long as employment data stays mildly strong, the Fed will continue the free money party.
Many of you have asked me about my bearish silver position, and as an update I closed it yesterday. I had 89% profit in a week – and while I expect silver to fall again I would rather lock in my gain and reload a position later. I did begin a bearish oil and a bearish yen strategy yesterday and will let those trades ride this week.
I do not expect a major decline in the market this week, but honestly very few stocks look appealing. Until the bears take out one support zone it will be difficult fore me to jump into shorts, but at the same time stocks that I consider to be strong fundamentally display signs of a top. I will continue to look for promising trades to the long side, but trade this week is reserved for aggressive traders only – everyone else please stay in cash or bump up your stops.
Watch List
The TradeMaster Daily Stock Alerts watch list is bullish again - and this time it's on small caps and China. To receive daily alerts each day before the market opens and for a full list of our trades and video of our current stock watch list CLICK.
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