Yesterday’s close above 1200 in the SPX was fairly constructive by most accounts, capping off a little more than a 9% rally off last weeks lows. I think it is fair to say that most technicians and strategists expected that sort of bounce from an extremely oversold condition……As I evaluate the strength of the rally off of the bottom I look at breadth and volume, both of which need to keep pace for it to get some legs……in general most sectors seem to be participating, but this could easily peter out if volume on the upside moves doesn’t pick up. Friday and yesterday’s volume were the lightest days since Aug 1st and basically half of what it was in the height of the sell off. What this tells me is that there was clearly some form of capitulation and that the buying that followed, while impressive, does not match the conviction of the selling of the prior weak.
The S&P futures are down a little over 1.25% as I write at 8:50am in sympathy with European markets following a very weak German GDP reading of 0.1 vs the expected 0.5 and down from Q1’s 1.3%. The DAX (down 2.5% this morning) which is down ~22% from the May high was once considered to be a safe haven to the PIGS that surround them in Europe, but if their own data continues to disappoint and they continue to bear the brunt of bailouts, Germany themselves could find themselves in a bit of a mess.
The SPX is likely to have a tough time between 1200 and 1250 and I would be very surprised to see a quick move through the higher end of the range. The best thing here would be a consolidation between 11 70 and 1200 to help stage a rally back to key resistance. If the market can’t hold on today and we find ourselves back towards 1150 then watch out below. The state of the markets, despite the recent move are perilous at best…….The Bank stocks have to hold on here, they can’t continue to take one step forward and two back, that will end up with these stocks making lower lows in the coming weeks.
I remain in the camp of caution and want to preserve capital as I do believe we are likely to make a test of the previous lows in the weeks to come. If you just can’t resist buying stocks here considering buying a portion of a position and leave some room to average in. You don’t want to be the guy buying at 1200 and then puking back out at 1050…….