Stock Market Analysis

Monday, April 01, 2013

Dow Sideways Following ISM Index

Ain't no April Fool in the market today as the Dow halted its advance, closing 5 points lower on poorer than expected ISM Index.

Fundamentals
After weeks of encouraging economic data, investors were greeted with the first piece of significant bad data as ISM Index turned in worse than expected at 51.3 vs 54.2 last month and a consensus of 54.0. Yes, analysts do expect ISM index to turn in slightly worse than last month but not by this much. The Dow was halted in its advance but did not turn downwards significantly. However, investors were already returning to the safety of bonds, depressing bond yields as options traders pushed total equities put call ratio up to 1.0, signifying complete short term uncertainty. Indeed, the market has been extremely resilient so far this year and market action today displayed that kind of resilience despite such significant bad showing on the ISM Index. The ISM Index is an index for manufacturing activities and typically shows a growing manufacturing sector above 50.0 and a contracting one below 50.0. Investors place significant emphasis on this data because it is always the first data out each month and its strong correlation to GDP.

Technicals
Even though the Dow closed lower today, it was in actual fact just another sideways day as the Dow continues to wait for its 30MA to catch up before having the momentum for one final push up. Interestingly, the Dow has already started forming a bearish divergence at this level. This usually mean a significant short term drop to slightly below the 30MA like what we saw back in January and February. However, with the prospects of an intermediate correction being imminent, this could also signal the start of the intermediate correction itself. How the Dow hold up at the 30MA will tell us if this is just a healthy short term pullback of the kind we saw back in the past few month which always leads to new highs, or is this the start of something more significant that the market is currently due for. Even if the Dow does recover after touching the 30MA, I would still be careful for an intermediate correction in the near term horizon. All in all, not the best time to be enthusiastically newly long.

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

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