USA Markets & Economy – Best Strength in a Weakening World

The S&P 500 closed down 7 points or about 1/2% for the week ending June 22, 2012.

After a promising start to the week where the S&P 500 rose to 1,364 – right into the resistance zone we discussed in last weeks article – the index turned down on the markets disappointment that the US Federal Reserve did not offer more monetary stimulus at this weeks meeting.  The Fed did decide to extend Operation Twist – which is the selling of short term treasuries and the buying of long term treasuries in their attempt to keep long term rates down – until the end of this year.  The Federal Reserve also indicated that they stand ready to offer more stimulus in the future if they determine that the economic outlook required it.

Below is a chart of the S&P 500 –  we have added what we feel are the current resistance levels and support levels for the chart.  Our current viewpoint is that Investors are for now stuck in the middle of both zones.  If the markets were to rally over the near term we would use that strength to be  selling partial positions into the resistance zone.  Likewise, we would consider adding exposure if the market were to decline in the support zone that we have identified on the chart.

 

(Click on Image of Chart for a Bigger Picture)

 

 

On the Economic Front – most reports this week were disappointing, continuing the recent trend.   Unemployment claims came in higher than expected while new housing starts came in slightly lower than expected.  However it was the Philadelphia Fed Manufacturing Report that really shook up the markets on Thursday.  The Philadelphia Fed Manufacturing Report came in at -16.6, it’s lowest level since last August (when the markets were selling off nearly 20% from their highs).  Besides last August there have been only 2 periods in the past 10 years – the 2008- 2009 financial market meltdown and the 2001 recession – when the Philadelphia Fed Manufacturing Report report such weak levels of activity.

We have also noted this week that the USA is sitting on it’s largest stockpile of oil – for this time of year – in over 2o years.

This should provide relief to consumers over the next 3-6 months as the record stockpile of oil will keep downward  pressure on gasoline prices.  Some energy industry experts state that the price of gas could fall to under $3 before the end of the year.   See chart below.

 

(Click on Image of Chart for a Bigger Picture)

 

 

 

While on the surface this surplus of oil and resultant cheaper gas would seem like good news, it can also be interpreted as another sign that the US economy is slowing more than what forecasters had predicted.   An economic slowdown at this time will be very harmful to people who are either unemployed or under-employed as the US economy is  still facing serious challenges to produce enough jobs to bring unemployment down to pre-2008 levels.

 

Forecast for the Next Week

We would like to think that we could nail these calls as accurately as we did last week where we said we like the market technically but we felt that with the fundamentals of the economy deteriorating, we did not foresee the S&P being able to rally too much higher through  it’s resistance zone.  This is exactly what happened last week.  However, we are quite certain that many of our forecast will not come in this accurately.

For this week we refer readers to the chart of the S&P 500 we have posted above.  We have drawn out the overhead resistance and the below support levels.  Since we are in between both zone, we recommend doing nothing.  As mentioned if the S&P 500 were to rally into the 1,370 – 1,385 zone we would trim some of our long positions.  Likewise if there is a near term sell off, we would consider establishing positions at the Red support levels on the chart.

We again urge caution to our readers now.  We feel that the economic indicators are continuing to deteriorate.  Looking outside of the US Borders we have much of Europe either in a recession or near one.  China is reporting it’s slowest economic numbers in years.  Furthermore, numerous international stock markets have had more  technical breakdowns over the past week and they suggest lower prices in these markets in the near term future.  We have posted before that all world economies and stock markets are correlated.

Many people are unaware that the USA economy and markets have actually outperformed much of the world over the past 12 months.  Like Rocky Balboa – the resiliency of the USA markets have been remarkable when compared to the markets in Europe and Asia.  However, we are doubtful that if most of the major economies and stock markets are continuing to go lower it is very unlikely that the USA markets and economy will escape the ride down lower with them.

 

 

 

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