Stock Market Analysis

Wednesday, June 01, 2011

1-2-3 Strike To The Jaw...

What a way to kick start a new month. The Dow shed 279 points today, making it the worst day in the market since June 2010.

US market took a one-two-three strike right to the jaw today as ADP employment first set a negative tone for the market opening by turning in its worst level since 2010. It was then quickly followed up by a much worse than expected ISM index, turning in its worst level since September 2009 when the recovery began. The final upper cut to the jaw came in the form of Moody's downgrading of Greek debt along with a negative outlook. This was all it needed for investors to go full flight back into the safety of bonds as bond yields dropped across the board significantly. Indeed, investors have been extremely sensitive to developments on the Greek debt issue and are reacting strongly to any such news. Yesterday's Germany offer to help resulted in a strong single day rally and today's downgrade seem to carry an even stronger reaction. The sudden drop in the ISM index was also a big concern. Not even in 2008 did we see a drop of such magnitude. It was as though the economic engine of the US suddenly got choked and ground to a crawl. The only consolation is that the ISM index is still holding above 50, which indicates economic growth and has held above this level since Aug 2009. Investors seem to have overlooked the very positive retail data today. Better retail now usually spells better economic growth in the near future and this could actually be indicative of the end of this period of very volatile economic data. Certainly the only spanner in the clockwork is the Greek issue and we can expect volatility in the market with each news update on the issue.

It was indeed a jaw dropping day today with the Dow making a new low for the month, erasing the gains of the past 4 trading days. Still remember I mentioned that the market is overdue a strong intermediate pullback the kind we saw back in May 2010? Today's biggest drop since June 2010 seems to be heralding in such an intermediate pullback. However, it is impossible to tell if it is so from just a single day drop. Therefore, tomorrow will be critical. Investors and traders need to prove that they are capable of overlooking today's news and get back in on the bargain tomorrow in order to save the day. If tomorrow continues to be a soft negative day, then it would be clear that not even traders are bargain hunting and that maybe the intermediate pullback would happen from here on.

For now, the Dow remains in a short term neutral trend, within an intermediate and primary bull trend.
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