- Old yet ever-present European issues rise again, sending world markets lower.
- China, EU manufacturing weakness piles on US 2011 decline, adding to the day’s angst.
- Struggle to hold the pattern for a new breakout attempt fails as US indices fall back into their trading ranges.
- Some solid leaders demonstrate their strength, at least compared to the market, holding support and/or recovering off early selling.
- Good action now looks like holding the trading range and trying to set up a new breakout.

MARKET SUMMARY

Economic double dip worries hit world markets.

US stock indices struggles all last week to hold onto the upper end of their trading ranges and despite issues, were doing a decent job of it.  A new week and, alas, new problems.  Well, old problems coming to the fore once more.  European manufacturing levels fell sharply below expectations with the big dogs Germany and France dropping markedly as well.  Italy’s credit rating downgraded to negative from stable.  Not even a halfway move to not as stable, just straight to negative.  China manufacturing suffered as well, declining for the first time in 10 months. 

Combined with the US economy’s 5 month decline while inflation starts to gain footing and the recipe for more downside was complete.  As garnish the Chicago Fed, not to be confused with the Chicago PMI, fell to -0.4 from 0.32 in March, the lowest reading since March 2010.  With that kind of economic horsepower, the buyers never showed up on Monday, leaving the day to the sellers.

Stocks opened lower with a big 1+% gap.  Interestingly, the sellers shot all of their ammo on the open.  After the gap the indices traded sideways in a tight range until the back half of the afternoon session when they actually managed to top the day’s trading range – - only to fade into the close but holding the top half of the range.  Not that big of a deal when you look at the 1.6% NASDAQ loss, -1.2% on SP500, -1% on DJ30, -1.7% on SP600, and the SOX off 2.1%.  At least volume was not runaway, coming in lower on NYSE and higher but still below average on NASDAQ. 

The losses sent SP500, DJ30, SP600, and SP400 below their May lows (last Tuesday) and basically bulldozing the ABCD patterns.  NASDAQ gapped lower and closed below its May low, but it is holding just over some key support.  Down, not looking great, but not out.  The indices are in their former trading ranges and longer term that can be positive if they can base again inside the range and make another run at the breakout.  They have to have a reason, however, as shown on the last attempt: they made the break but could not make it stick.  After a good earnings season the market was unable to push a new breakout, at least hold it.  What is out there that would cause the market to start building in an expectation of better times ahead?  What indeed.

TUESDAY

With the stocks indices taking a tumble back into the range even with solid earnings, economic data becomes important.  The market needs some reason to improve its outlook for the future.  Of course it is acting as if it peaked into the future and didn’t like what is sees.  Unfortunately New Home Sales likely didn’t surge, and even if it did jump no one would believe it just yet given home prices have yet to firm.

That leaves the market mulling the continuing downturn in economic data and likely not to get any help.  As it mulls it certainly looks as if it is going to trade in the range.  Watch DJ30.  It is heavily tied to the export economy and as that is what the stimulus, bailouts, and weaker dollar program were geared toward, and consequently they performed the best.  With the worries about China and the EU, they are now selling but the Dow is still holding over its February peak.  If it holds that suggests the rest of the market will simply consolidate some more and then resume some upside.  If it doesn’t then there is some consolidation for sure and you have to watch if SP500, NASDAQ and the others can hold the bottom of the range. 

There are predictions out there of a selloff to 1250 (the March low) and then lower to 1200 or 1150.  It is possible.  It is always possible.  The indices have run a long way on this move, consolidated in a base, broke out, then could not hold the breakout.  Economic data is waning this year and won’t come close to the 3.2% from Q4 2010.  QE2 is going away in name, and the Fed is talking about doing away with ‘son of QE2′, i.e. ‘reinvesting’ principal payments from the crud the Fed is holding (e.g. bad MBS), though not over the next few months. 

Liquidity drives the rally.  If the market feels liquidity is going away it will start factoring that in.  The inability to hold the breakout is a different look from this market since the 2010 summer base.

At the same time there are still buyers in the house.  They have not all left just yet.  There were many down stocks Monday, but many ‘names’ recovered off their lows.  Maybe they did not reverse and race upside but they rallied off the lows as buyers bought on the dips.  AAPL, AMZN, TSCO; ASH, IBM are examples of stocks that sold off early but then rebounded to significantly cut the losses.  Buyers stepping in on the dips.

At some point the dip-buying ends.  After buyers get burned sufficiently buying on the dips they quit and then things really fall.  Or they reach bottom and they bounce.  The key is there is still enough of a reason for buyers to remain in the majority and actually go out and buy. 

For now quality stocks are trying to hold.  Some act immune to the selling, rallying in its face, e.g. CMG.  Others test or hold their trendlines, also ignoring the selling.  While watching the Dow, also watch the likes of BWLD, SBUX, DDS, IBM, ESRX, TIBX, RVBD, PLXS, CTXS to name a few.  They are holding the line, market leaders in their own right.  If they hold that is a good market prognosis. 

The market has balked at a new breakout. It is falling back into the range to mull it over.  Watching leadership clues you in to what the market is deciding.  For now the market momentum and bias is obviously downside but again, watch what the leadership does and that gives a heads up as to where the indices are heading.