Equity Clock

Stock Market Outlook for June 7, 2010

Upcoming Events for Today:

1. The Federal Reserve will release the Consumer Credit report at 3:00pm.   The market expects a decline of $2.0B versus an increase of $2.0B previous.

The Markets

Despite another consecutive month of adding jobs, investors heavily sold off equities on Friday as the May employment report came in lower than expected.   Of the 431,000 jobs created, 411,000 were temporary in nature as a result of the Census that will see the elimination of the positions come the summer months.   This sent mass fear through the markets as investors struggle to find a catalyst that will once again send this market higher.   Unfortunately, this coming week does not bode well in finding that positive market mover with sparse news being released that is unlikely to alter the market decline.

Seasonality says that in these mid-term election years the bulk of the declines come from the end of April to the end of June.   Second quarter earnings season then gives the market a slight leg up, despite the increasing volatility, and this takes us through to August.   The market then bottoms in September before rallying to gains in the last quarter of the year.   So, we’re not out of the woods yet.   Actually far from it.   May and June are the best months during mid-term election years to play the market from a bearish perspective.   Therefore “Bear” ETFs  and options with a downside target of September are ideal to protect and/or aggressively build your portfolio.   These are the suitable alternatives to cash,  but beware of the volatility which will continue to cause the market to swing wildly as the bears and bulls battle it out. 

We are approaching some key technical levels that should soon confirm a bear market.   The markets last week were essentially indecisive, gaining and losing an approximate equivalent amount.   This creates an interesting situation as many bullish investors that bought into the belief that last week was the bottom, and entered at the appropriate time, are holding on to securities that are just about flat as it pertains to returns.   If the market trends lower, then investors that were not shaken by Friday’s activity will now be selling on the fact that Friday was not just a one-off decline.   Also, last week a report indicated that fund redemptions were on the rise.   This becomes another point of significant concern as a large liquidation of securities by institutional holders will lead to further collapse of the market as investment managers seek sufficient cash positions to cover the withdrawals.

Market sentiment looking at options volumes is relatively neutral at present with a put/call ratio of 0.97.   It’s interesting to note that the 10-day moving average with respect to the put-call ratio continues to decline, implying a potential entry point.   However, having just come off an indecisive first week of June, where gains were made and then lost, further data is required to confirm a decline.   Chances at this point appear probable that this moving average has not topped out just yet.

Sectors that Moved the Market

Losses covered all sectors on Friday, with Industrials leading the decline.   Defensive plays in Health Care and Consumer Staples continue to hold up better than the broad market, however even they are not a safe haven from the mass losses.   A couple of weeks ago we published the opportunity in a pair trade of Shorting the Consumer Discretionary sector and holding Long the Consumer Staples.   This trade continues to perform well and appears the ideal play during the remainder of this month.   Many individual equities within Consumer Staples have seasonal start dates beginning in the present month, adding more appeal to the prospect of this pair trade.

S&P 500

Chart Courtesy of StockCharts.com

Friday saw the S&P 500 crash through a number of technical levels before touching 1,060, the February low, and rebounding only marginally.   This level is expected to be broken as well, with the speed of selling increasing as investors that have watched their gains fade away become increasingly resistant to turning to a loss position.   Ultimate target continues to remain 960 by September.   However, targets as lows as 844 have been touted by analysts that are increasingly bearish on the market.   The expectation of 960 comes from the expected value that investors will find in the market around such levels based on improving fundamentals in the economy.   Albeit at a slower pace than all had anticipated as a result of the stalling worldwide financial situation, the economy is still improving, therefore there is no reason to see this index discounted to the low 800’s.

Total Returns

Yesterday: –3.44%  –  Trailing 5 days: –2.25%  –  Trailing 30 days: –8.66%

Averages for current day based on past 20 years of data

• Current Day: –0.12% with 35.71% of sessions gaining
• Next 7 days: –0.40% with 48.75% of sessions gaining (Max return: 0.46% by June 9 on Average)
• Next 30 days: –0.68% with 50.45% of sessions gaining (Max return: 1.65% by June 22 on Average)

TSE Composite

Chart Courtesy of StockCharts.com

The Canadian market continues to hold tremendous value due to the potential of many of the commodities that it possesses.   As a result, the decline is not expected to be as severe, finding support precisely at the February lows of 11,100.   The next target down is 11,400.

Total Returns

Yesterday: –2.05%  –  Trailing 5 days: –1.53%  –  Trailing 30 days: –2.57%

Averages for current day based on past 10 years of data

• Current Day: –0.53% with 16.67% of sessions gaining
• Next 7 days: –0.90% with 44.00% of sessions gaining (Max return: 0.48% by June 9 on Average)
• Next 30 days: –1.12% with 48.71% of sessions gaining (Max return: 2.00% by June 20 on Average)