Who Asked You?

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There is no way the Europeans can work themselves out of this mess. There is no way the Europeans are going to invest trillions of dollars in forming the European Union and then simply walk away. I have heard both statements over the past few days. Leading up to the end of last week it was a coin flip to see which statement would be true. I heard both statements and tried not to become a professional coin flip predictor. At the end of the day I am not an economist or a strategist. I have to look at a sheet of paper and see a portfolio looking back at me. It is real world stuff for me, it is not theoretical. So, before the announcement was made, we all knew the powers that be were getting together, I stuck to the drill. As names rolled over and looked as if they were about to move into their own private bear markets I sold them. My focus remains on owning names that are performing.

I held some cash going into trading Friday because there was no way for me to know the outcome of the coin flip. For now it appears the group that thought there has been too much invested in Europe to simply walk away has the lead. The market tells me that is the case. No one really cares what you or I or anyone else for that matter thinks about the plan cooked up by the European leaders. People sold stocks because they couldn’t see what the plan for Europe was going to be. The plan has been announced. If no one really cares what you thought the outcome of the coin flip would be, you can rest assured they really do not care to hear your thoughts on the merits of the plan. The market is going to do what it is going to do. If market movements differ from your opinion or the opinion of some guy you pay $369 dollars a year to get his newsletter you better get in tune with the market. Because when you or I tell the market what we think should happen the market has a clear answer: who asked you!

There were concerns regarding European banks and government debt across Europe. Many of those concerns were alleviated on Friday and the market roared ahead. The broader market gained 2.49% on Friday and ended the first half of the year up 8.3% as European leaders agreed to directly inject money into troubled European banks. Now the market is retesting the downward resistance line off the highs seen in April. What do we do now? You should know the answer by now, stick to the drill. Look for names that are in basing or advancing stages. Hopefully, there will be a longer list of those names to choose from in the coming weeks. While there have been fewer names to buy over the past several weeks there have been winners. It was a tough market in the second quarter. It seemed tougher because it was so easy in the first quarter. While the market is off its highs the S&P 500 was up 8.3% for the first six months of the year. No that is not a typo. The S&P 500 was up 8.3% in the first six months of the year. Europe did not implode and the world did not spin off its axis, again. There were over 250 stocks and ETFs hitting new 52 week highs last Friday with roughly 30 hitting 52 week lows. Breadth improved significantly in June. We just went through our best June since 1999. The drill does not waver. Buy basing and advancing stocks and punt stocks that are not performing.

Last week I gave you the following near tem support levels for the S&P 500/Dow/NASDAQ/Russell 2000: 1323/12,550/2850/760. All of those levels were breached last Monday except for the Russell 2000. The Russell closed at 762 last Monday. That is a positive divergence and the market rallied Tuesday and Wednesday. Two weeks ago I gave you the following numbers for resistance 1336/12,615/2885/780. At the close Wednesday some, but not all, of those levels were taken out. That is a negative divergence. The market sold off sharply at the open Thursday. All looked lost and the support levels were giving way until the final hour of trading. News hit the tape that Angela Merkel was not going to appear at a press conference. Smart money knew this meant the plan was coming. I can’t make this stuff up. The announcement that the Chancellor of Germany was not going to appear at a press conference sparked a sharp rally into the close Thursday. This crated a positive divergence as the support levels held. Three divergences in one week tell you how uncertain the market was last week. The plan was announced overnight Thursday our time and the market smacked the bears right between the eyes.

Where are we now technically after the amazing moves we saw last week? 47% of the stocks in the S&P 500 are in good shape technically. In June the worst reading for this gauge was 31%. So things are clearly not great but they are improving. So, with roughly half of the stocks in the S&P 500 in good shape the long term trend is neutral. No, it is not all clear nor is it time to run for the hills. Stock selection is critical. Many stocks continue to perform very well. Many are in their own private bear markets. 

The intermediate term trend improved substantially with the rally last week. We have seen the major averages attempt breakouts and avoid breakdowns over the past several weeks. It is a positive that all major indexes are trading above their 50 day moving averages. If the following levels are overcome then the intermediate picture will likely improve: S&P 500 1365/Dow 12,900/NASDAQ 2945/Russell 2000 has already gone above its 790 resistance level. Intermediate term support is 1298/12,387/2794/748.

Short term support levels are as follows: 1330/12,600/2850/775. After a great run like last week it is likely we’ll see some pressure on the market. The market closes early tomorrow and is closed completely on Wednesday so trading this week will be unpredictable.

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About Thomas J Smith CFA

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