THE MAY 22nd ‘KEY REVERSAL’ TRIGGERED A NEARLY A 700 POINT CORRECTION IN THE DJ AND a 87 POINT CORRECTION IN THE S&P. THAT MAY HAVE BEEN IT! WATCH TODAY’S TURNAROUND TUESDAY AND THE BANKING STOCKS FOR A SIGN THAT WE COULD BE HEADED TO NEW HIGHS. THE CAVEAT IS THAT IF THURSDAY’S LOWS (E.G., 1598 SPX) DOES NOT HOLD GOING FORWARD, THE ‘SELL MAY AND GO AWAY’ WILL BE RIGHT ON TARGET TO THE EXTENT OF 1525 SPX and 14198 DJ.
Unlike Friday, the stock market didn’t provide a lot of trading excitement on Monday. The major indices spent time on either side of the unchanged mark, but were never able to achieve a good deal of separation either way as buyers and sellers alike lacked conviction. There was some initial excitement when it was announced before the open that Standard & Poor’s raised its US outlook to Stable from Negative, citing a lessening of downside risks to its AA+ rating for US sovereign debt. That positive-sounding headline helped stocks get off to a decent start, yet buying efforts soon tapered off as a concurrent rise in long-term interest rates seemed to limit the stock market’s enthusiasm for the outlook change. The yield on the 10-year note moved up to 2.23%, or roughly six basis points higher than where it settled on Friday. The move was striking considering the switch by Standard & Poor’s should have been construed as a good thing for the Treasury market. The ensuing weaknes s, though, seemed to fit with the sense that an improving economic outlook would lessen the safety premium in Treasuries and encourage a rotation into stocks. Nonetheless, not all participants are convinced that the economy will gain steam in coming months; hence, there were some underlying concerns that the jump in rates could retard the recovery as they interfere with the rebound in the housing market.
There wasn’t any economic data out on Monday, but ‘talking mouthpiece’ St. Louis Fed President Bullard did address economic conditions in a speech on the global economy. Mr. Bullard is a voting FOMC member and he walked the party line of providing a little something for everyone in the tapering debate. To wit, he suggested the low rate of inflation could be justification for the Fed to maintain its aggressive asset buying over a longer time frame and then added that an improved labor market could mean the Fed might slow the pace of its asset purchases.
The Wholesale Inventories report for April (Briefing.com consensus +0.2%; prior +0.4%) is the only piece of US data slated for release on Tuesday. It won’t be a market mover, so the direction of currencies and interest rates could be dictating factors along with any new insight from Germany’s Constitutional Court on the legality of the eurozone’s crisis-management measures.
Also, it’s TURNAROUND TUESDAY. With Monday down, can we expect a nice pop? Watch XLF (the banking ETF) and names in the sector. Goldman Sachs (GS) broke out on Monday and that could be telling us we’re looking at new highs.