Market Analysis – Don’t Get Bitten by a Dead Cat Bounce

 

The only consolation regarding yesterday’s decline, according to one observer, was that it “wasn’t as bad as the prior session’s sell-off,” i.e., Tuesday’s 225-point Dow rout. But the market did close lower, and the reasons are the same: Greece’s financial condition and the threat of a contagion throughout Europe.

And the fear of a worsening scenario was heightened yesterday when Moody’s placed Portugal’s debt “on review.” This year that term has been followed by a cut in bond ratings, so increased concern in European boardrooms is probably warranted.

But in the United States, there were some stocks that bucked the trend yesterday. Consumer staples rose 1.3% and health care gained 0.25%. However, energy posted the biggest losses, off more than 1.5%, and industrials fell 1.5%.

Economic reports were positive, but the market was not focusing on either domestic economic reports or company earnings. The April ISM non-manufacturing index reported 55.4% versus an expected 56%, and the ADP employment report for April showed a slightly greater-than-expected addition of 32,000 private payrolls.

The euro hit another low yesterday closing at 1.28 versus the U.S. dollar. 

At the close, the Dow Jones Industrial Average (DJI) was off 59 points to 10,868, the S&P 500 (SPX) fell 8 points to 1,169, and the Nasdaq (NASD) fell 22 points to 2,402.

The NYSE traded 1.5 billion shares with decliners ahead of advancers by 4-to-1. The Nasdaq traded 755 million shares with decliners ahead by 3-to-1.

What the Markets Are Saying

This week’s selling has driven every index lower with each smashing through its respective 20-day moving average. Yesterday, the coup de grace was administered as the S&P 500, Nasdaq and  NYSE Composite broke cleanly through their respective 50-day moving averages.

Looking back, it is now evident that our internal indicators, backed by the sentiment indicators, clearly charted the breakdown that was about to consume the stock market. It has, admittedly, been tough to convince people that we were approaching an intermediate top because it was formed with such a plodding. And it will be just as difficult to convince the bulls that the breakdown’s final target may not be achieved until at least the early fall.

The bulls still want to believe that what we are seeing is just a one- or two-week event rather than a full-fledged correction. But the index charts are saying that intermediate tops are forming with the next support for the S&P at 1,153. All of our indicators are now in the slightly oversold area and confirm that the market is in a short-term correction. 

There is no indication yet of a bounce, but we can be almost certain that one is coming. With every internal indicator now oversold and downside volume at 13-to-1 on Tuesday — for the third time in less than three weeks — and with the S&P 500 now in its first real area of support, we may be confident of a bargain-hunters fling.

But upside resistance for the S&P is at the March peak of 1,180, and it looks like that is all that we may expect from a quick dead cat bounce. The current support zone for the S&P is 1,153 to 1,170, and yesterday’s close at 1,165 put us in its upper range.

We may see a bounce late today or tomorrow. Wise traders will be selling into it. Those who buy into it will be bitten by a dead cat. 

The goal of this correction is nothing less than a test of the January/February low at 1,044. My guess is that the selling will be confined to the 1,100 to 1,110 area, and tomorrow I’ll tell you why.

Today’s Trading Landscape

Earnings to be reported before the opening include: AAON, Abovenet, Aecom Technology, AGA Medical, Airgas, Alliant Techsystems, Allied Healthcare, ANSYS, Arch Chemicals, ArQule, Avista, Biovail, BlueLinx, Bronco Drilling, Brookfield Asset Management, Brookfield Properties, Cedar Fair, China Automotive, CIGNA, Cincinnati Bell, Cogent Communications, Consolidated Communications, Delek US Holdings, Denbury Resources, Diamond Management, DirecTV, Dr. Pepper Snapple, El Paso, El Paso Pipeline Partners, Elizabeth Arden, EnPro Industries, Exterran Holdings, EZchip, Fortress Investment, FreightCar America, Frontier Communications, Frontier Oil, Fuel Systems Solutions, Genesis Energy LP, Gentiva Health Services, Gerdau AmeriSteel, GLG Partners, Great A&P Tea, H&E Equipment Services, Heartland Payment Systems, Hewitt Associates, Hillenbrand, Holly, Hornbeck Offshore, HRPT Properties, Hyatt Hotels, ICF International, IdaCorp, Incyte, Infinity Property & Casualty, International Flavors, ISIS Pharmaceuticals, Koppers Holdings, K-Swiss, Kulicke & Soffa, Lamar Advertising, Level 3 Communications, Lexington Realty Trust, Littelfuse, Liz Claiborne, LMI Aerospace, Markel Corp., Maximus, Medical Properties Trust, Metalico, MetroPCS, MGM Mirage, Micrus Endovascular, Momenta Pharmaceuticals, MWI Veterinary Supply, National Interstate, NGP Capital Resources, NorthStar Realty, Obagi Medical, OM Group, Omega HealthCare, Omnicare, Orion Marine, Perficient, Pinnacle West, Pioneer Drilling, Plains Exploration, Playboy, PPL Corp., Precision Castparts, QLT, Rayonier, Reliant Energy, Rofin-Sinar Technologies, Royal Gold, Sara Lee, SCANA Corp, Scotts Miracle-Gro, Scripps Networks Interactive, SkyWest, Smart Balance, Smith & Nephew, Sotheby’s, South Jersey Industries, StarTek, Stereotaxis, Steris, Suburban Propane, Sun Communities, Superior Well Services, Swift Energy, SXC Health Solutions, Symmetry Medical, Tasty Baking, Tekelec, Telephone & Data, Teradata, TreeHouse Foods, U.S. Physical Therapy, US Cellular, Warner Music Group, Western Refining, Wonder Auto Technology and World Wrestling.

Earnings to be reported after the close include: 51job, Accuray, Air Methods, Allied World Assurance, Alon USA Energy, American Public Education, AMN Healthcare Services, Aqua America, Bebe Stores, Big 5 Sporting Goods, BigBand Networks, Blue Nile, Brooks Automation, California Pizza, Callon Petroleum, Camden Property, Canadian Natural Resources, CareFusion, Caribou Coffee, CEC Entertainment, Clean Energy Fuels, Cogdell Spencer, Cogo Group, Coleman Cable, Consolidated Edison, Copano Energy, Crocs, DCP Midstream, DCT Industrial Trust, Diodes, Dionex, DragonWave, Eagle Bulk Shipping, Echelon, Einstein Noah, Emdeon, Energy Recovery, Entercom, General Cable, Genoptix, Great Plains Energy, GSI Technology, Hansen Natural, Harmonic, Home Properties of NY, InnerWorkings, Insulet, Internap, Kodiak Oil & Gas, Kraft Foods, Leap Wireless, Liberty Global, Limelight Networks, Liquidity Services, Luminex, MAKO Surgical, Marchex, MercadoLibre, Mid-America Apartment Communities, Millipore, Move, MTS Systems, Multi-Fineline, Nabi Biopharmaceuticals, Nanometrics, National CineMedia, Nationwide Health, Navigators Group, NightHawk Radiology, Novatel Wireless, Nu Horizons Electronic, Online Resources, PartnerRe, Penson Worldwide, PerkinElmer, PharMerica, PowerSecure, Public Storage, Radiant Systems, RealNetworks, ResCare, Rosetta Stone, Rovi, SandRidge Energy, Sapient, Scientific Games, Solera, SRA International, SRS Labs, STEC, The Knot, TTM Technologies, Universal Electronics, U-Store-It, Verisk Analytics, Vitacost.com, Weight Watchers, Weingarten Realty, Westar Energy and XenoPort.

Economic reports due: Monster Employment Index, jobless claims (the consensus expects 445,000), productivity and costs (the consensus expects 2.6% for non-farm productivity and -1% for unit labor costs), EIA natural gas report, Fed balance sheet and money supply.

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