The last seven trading days we have rested after a two month rally. For two months we saw the NDX and Russell up nine straight weeks and the S&P and the DJIA up eight out of nine. The last seven days we saw profit taking occur in a slower than average option expiration week allowing the markets time to digest the recent banks stress tests and earnings results from various companies. The indices were all lower, with the Russell being the weakest, dropping 7.0%, the S&P down 5.0%, followed by the DJIA at -3.6% and the NDX at -3.4%. Financials were the worst sector overall falling 12.1%. This is a sharp contrast to last week when the group rose 23% on the bank stress test results. The losses were pretty consistent across the board with industrials dropping 7.6%, consumer discretionary stocks falling 7.3% and energy losing 6.8%. All of the ten spaces in the S&P 500 ended the week down. This broad based sell off could signal a bigger move lower if we take out certain levels on volume. It is worth noting that technology held up the best and is probably where capital is beginnig to rotate.

Staring Over the Horizon

What lies ahead? There is a lack of catalysts on the horizon, with the stress tests and earnings coming to an end. This could lead to some choppy trading, especially as we enter the historically slower summer months. Two of the reasons the markets had such a vicious move off the lows is because the banking industry didn’t fail and a “slowing” recession gave the markets optimism and confidence. Expect those that missed the move to look to enter at the right levels if we hold. Also expect some of the larger forces that sent the markets trending higher to lurk.

Four Parts of Our Conundrum

1. The Consumer

The consumer is still hurting and having a difficult time getting credit.

2. Real Estate

Prices have gone down in many markets and might fall further. In others, however, there have only been minor corrections. Despite interest rates being where they are (we all know who controls rates) housing probably is not going to get much better anytime soon. (Especially now that the European speculator has gone the way of the dodo bird.)

3. Employment

Although ADP #’s took the markets higher recently, the bottom line is that The Labor Department's weekly data showed more workers filing for unemployment benefits. Also, new claims jumped to 637,000, above what economists had forecast and the overall number of people trying to get unemployment benefits also grew faster than expected. All of three of these components are important not only to measure the overall economy, but in terms of confidence and sentiment, which are vital to economic health.

4. Stock Market

The stock market that has lifted 37% on renewed confidence, mutual funds chasing performance and to some extent, a short squeeze that saw buying beget buying. The economic numbers, the orchestrated leaks, the press conferences, etc., etc., also surely helped sentiment and aided in the recent two month rally. Consequently, the only one of the four components that can really be influenced with a great degree is the stock market. Although this probably won’t end anytime soon, the technical nature of the markets will help us decipher where we are likely headed.

The Week Ahead

Monday

Secretary Geithner speak at 11.30am on Monday

Deutsche Bank’s Healthcare Conference

JP Morgan’s TMT Conference

Rodman’s Healthcare Conference.

Tuesday

Housing starts and building permit numbers

Fed’s Stern will be speaking in Minnesota at 1:15pm

Wednesday

Oil and gas inventories

FOMC minutes released at 2pm

Testimony by Secretary Geithner at the hearing on TARP.

Thursday

Jobless claims

Philly fed #’s

Nat. gas inventories

BoJ rate decision

Fed’s Plosser speaking in New York

Now the levels. Looking for a possible “retracement” into the 870- 875 area where a test would seem logical. If we took out that level to the downside, we could go as low as 850-855, an area with a lot of support. This is where those on the sidelines probably get compelled to try and get involved from the long side. Oppositely, a move through 907- 911 (expect resistance at that spot), could take us to 927-929 and ultimately 950. Hence, it seems logical to expect us to trade in that range (850-950) over the next couple of weeks with the aforementioned levels as useful reference points. Unless of course something dramatic were to change regarding any one of the three factors that cannot be unduly influenced.

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