Even though this is now the beginning of the slow summertime period, I continue to think the bottom is in.
A Week in Review
The stock market kicked off last week with a strong start, but gave up a substantial portion of the advance throughout the week, eventually settling with a modest gain. The DJIA ended the week up 0.1%, the S&P 500 up 0.1%, the Nasdaq up 0.7%, and the Russell 2000 up 0.4%.
In our last post, we emphasized that the market was probably due for some period of consolidation. The advance off of March has had very shallow and short-lived pullbacks. Each of these pullbacks has been easily trounced to the upside — so far. Last week was calm as stocks continued to consolidate going into the Memorial Day Holiday.
A Look at the Week Ahead
The broad indices reached their highest post-crash levels two weeks ago. Since then, we’ve seen successively lower volume, just as you’d expect from a normal “cooling off” consolidation period. Even though this is now likely the beginning of the slow summertime period, I continue to think the bottom is in. No matter what the government is planning to revive and stimulate the economy, capitalism is working again, the financials are raising money in the private markets, and new products and services are being created and produced. That is what will lead the markets again.
We have been emphasizing that there is some fairly good resistance at the 911-920 area in the S&P 500, which is perched below the down trending 200-day moving average. From a market development perspective, the market has spent very little time digesting and consolidating from its recent vertical move up. It may see more sideways action at these levels to let equities work off their overbought condition.
Investor sentiment has turned extremely bullish. The shallow pullbacks we’ve experienced so far could be that many institutional managers have been chasing this market to the upside, which could signal further potential for correction. The Vix (aka “the Fear index”) has been on a downward trajectory and is now trading at levels we were at before the start of the Bear Sterns demise last summer. Perhaps this is also indicating a time to pause and at least move more sideways trading.
On the economic calendar, by Tuesday we will have Consumer Confidence and Existing Home Sales numbers. Both of these are being watched closely since they may show the worst is behind us. On Thursday, May 28, Durable Goods, Initial Jobless Claims, and New Home Sales will be announced. We will end the week on Friday, May 29, with the preliminary Q1 GDP, Chicago Purchasing Manager’s Index, and Consumer Sentiment.