Market Commentary for the week of June 25, 2012

Dull.
While the Dow Jones, S&P, and global bourses initially followed the EU’s announcements about Spain and Greece with a rebound, the rally stalled last week because facts trumped suspicion.  Short sellers and profit takers took control of the markets averting a weekend of being “long” in the face of more bad news.

Throughout, the skeptics remained on the sideline, leaving the “fun” to those with shorter attention spans.

All this occurred as summer volume declines began.  Up-versus-down volume was a smaller percentage of trades than in previous weeks during the rally.  Overhead supply is clearly offering resistance boundaries to any sustained breakout potential.  The 6 month rally appears to be diffusing.

While there is every hope that we can resume an advance and/or a breakout, technical resistance levels and stochastic negative probabilities might prove difficult in the next few weeks.

Besides, the cyclical advance that began last October was essentially a linear move in response to a decline from the previous summer.  In real terms, 6 months is a short intermediate cycle.  It is difficult to sustain momentum when relative strength numbers are moving so fast with no cyclical selling pressure as a counterbalance.

Thus, while the market seemingly had no key resistance, it was building negative potential all the while it was streaking upwards.  Now, we are faced either with a prolonged distribution period, or an immediate linear negative response to our prior upleg.  Both are “not good.”

Duller.

If a move to the downside does materialize there has to be a sequence of support breakdowns which accompanies it.  Over the past few months, we have streaked into a range whose probabilities of trend maintenance are diminishing.  The envelope opened and now it must close.  An equivalent analogy is either a parabolic ride on a roller coaster, or a missile shot straight up into space.  The trajectories, and end result, are quite different. 

As the market has struggled to gain “technical” traction it has also wrestled with fundamental economic diffusion.  While prices, in general, are not rising, there is a “pocketbook sense” that things are more expensive.  Fewer are being hired.  Portfolio valuations are stagnating, at best, as home values mostly continue to recede. Your Thanksgiving food basket this year will be appreciably more expensive than last.

And as “austerity” becomes the catch phrase du-jour, we feel, as well, that things are financially out of reach.  Salaries are “earning” less, eaten up by food, fuel, and tuition increases.  The percentage “going out” each month is taking a bigger share of family incomes.  This loss of discretionary abundance is at the core of a confidence crisis which renders the markets, and the economy, inert.

As a result there remains continued risk that we are far from moving above the top end of the market’s range, or our comfort zone.  It is not necessary to suggest a doom and gloom scenario.  But with the current statistics available, the weight of the evidence infers a stronger downside probability.