Market Outlook
The Week Beginning Monday, May 24th , 2010



Key Events This Week

Note:-All earnings dates listed below are tentative and subject to change.

This Week’s Economic Reports

Monday

10:00 AM EST Existing Home Sales.

Tuesday

9:00 AM Case-Shiller 20-City Index and,

10:00 AM Consumer Confidence.

Wednesday

8:30 AM Durable Orders,

10:00 AM New Home Sales,

10:30 AM Weekly Crude Inventories

Thursday

8.30 AM Initial Claims,

8:30 AM GDP Deflator

10:30 AM Weekly Natural Gas Inventory

Friday

8:30 AM Personal Income & Spending,

9:45 AM Chicago PMI,

9:55 AM University of Michigan Consumer Sentiment, and

…………the PCE core index for April

This Week’s Major Earnings Reports

Monday - Campbell Soup Company (CPB), Yingli Green Energy Hold. Co. Ltd. (YGE), and Phillips-Van Heusen Corp. (PVH).

Tuesday - AutoZone Inc. (AZO), Cracker Barrel Old Country Store Inc. (CBRL), Medtronic Inc. (MDT), Trina Solar Limited (TSL), and TiVo Inc. (TIVO).

Wednesday - American Eagle Outfitters (AEO), Diana Shipping Inc. (DSX), Solarfun Power Holdings Co. Ltd. (SOLF), Toll Brothers Inc. (TOL), Hoku Corp. (HOKU), Jo-Ann Stores Inc. (JAS), NetApp Inc. (NTAP), and Take-Two Interactive Software Inc. (TTWO).

Thursday - Big Lots Inc. (BIG), Costco Wholesale Corp. (COST), H.J. Heinz Company (HNZ), Tiffany & Co. (TIF), Guess?, Inc. (GES), J. Crew Group Inc. (JCG), Novell Inc. (NOVL), and OmniVision Technologies Inc. (OVTI).

Friday - There are currently no earnings reports scheduled for release.

Outlook for This Week

Friday provided some boost to the bull’s which may be enough incentive to extend their horns back into rally mode this week. The Dow Jones Industrial Average (DJIA) gave up a 4% of its value last week and even dipped below the psychologically important 10,000 level on an intraday basis on Friday. However, the bulls fought back and the Dow is now resting comfortably at 10,193.39, although it is still down about 9% of its 2010 high, set in late April.

DJIA since 2009



The CBOE Market Volatility Index (VIX) intraday high of $48.20, showing that a bear rally is not in control, but a 10% correction is taking place.

Below is a chart of the S&P 500 Index (SPX) since March 2009. With the significant corrections circled. In June-July 2009 the market fell more than 7% on a closing basis, and then in January-February 2010 the market had a correction of 8%. The last circle is the current correction.

S&P 500 Corrections



The three market corrections are quite similar.

Commodities/metals get hit especially hard during the pullbacks. Bonds and the dollar do relatively well. Gold outperforms the SPX and especially well in the last correction. The next two best-performing ETFs after gold are gold miners and silver. Those sectors are currently negative, but they have held up better than the SPX. That's different from the prior two corrections, in which they underperformed the SPX.

Maybe Thursday's close marked the bottom for a while and we will get a decent bounce over the next few weeks. Below are a couple of tables which show the best and worst five sectors of the prior corrections, and how they performed over the next two weeks and one month after the market hit its low.

What you will notice, is that the sectors that get hit the hardest during a correction generally bounce back the most. Looking at the table showing the June 2009 correction, we see all five of the sectors that performed the worst during the correction outperformed the S&P 500 over the next two weeks and one month. Also note that four of the five best-performing sectors underperformed the S&P 500 in the following month. A similar pattern is shown in the table with data from the January 2010 correction.

Corrections June 2009



It is important for investors to proceed with some caution, as the SPX did close below the key 1,100 level.

In another interesting development in Friday's trading, the VIX finally hit a level that matched its highs during the 1997 "Asian Contagion," and the 1998 "Russian Ruble Crisis." In addition, Friday's peak matched the two VIX crests during the first bear market of the new millennium. If the "European Contagion" does not have the negative systemic risk brought on by the Lehman Brothers bankruptcy and our own credit crisis in late 2008 and early 2009, the bulls may find the VIX high on Friday as an extremely encouraging development.

VIX monthly since 1990



Also, on Friday, the VIX's peak was above the high of the previous day, and both its intraday low and weekly close were below Thursday's low. To market technicians, this chart formation is known as a bearish "outside" day, which usually signals lower prices ahead. Or, in this instance, it could signal lower volatility in the days ahead, which would likely coincide with a rally in stocks.

Two weeks have passed since the “flash” crash of the markets on May 6, but last week saw levels fall to similar numbers as encountered then. However, the markets have rebounded sharply from the gap lower to not only negate it, but finish well up from this level, whilst undergoing some very aggressive buying. Bulls need to be cautious at this present time, as many of the shares are now in the hands of weak traders, who will be anxious to sell on any strength.

SPX - 30 minute chart



In looking at the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, you can see how sharp the recent decline has been, with several large red candles forming with high volume. The key question for traders will be whether Friday's bounce will lead to another rally attempt. SPY quickly became oversold and is quite extended from its 20- and 50-day moving averages. If SPY does attempt to move higher from here, the $114-$115 level will be an area to watch for possible sellers. This was the early January high and an area of trading activity a few days ago.

SPY-may 21,2010

The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, reacted similarly to SPY with a strong reaction after testing the May 6 “crash” lows. While the majority of the week was spent falling lower, DIA gave some hope to long investors with the positive close on Friday. There appears to be strong support near $98-$99 and this is a key level moving forward. A drop below that would surely have traders in a panic. Looking higher, the $107 area appears to be a possible area of overhead supply.

DIA - may 21, 2010



The Nasdaq, as represented by the Powershares QQQ ETF (Nasdaq:QQQQ), fared a little better than SPY and DIA in that it managed to hold above its May 6 lows. This is an important clue as it shows some leadership coming from the tech sector. QQQQ managed to close above its 200-day moving average and while the chart remains bearish, the relative strength as compared to its peers is promising. There is still some room underneath before QQQQ tests its lows and if the markets continue to falter, it's possible that those lows will still come into play as a possible bottom.

QQQQ - may 21, 2010



The Russell 2000, as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF, is showing a very interesting story. When comparing the price action of IWM versus its larger cap peers, IWM was weaker recently in that it actually traded below its May 6 “crash” lows on Friday morning. However, when looking at the larger trend, IWM remains in much better shape than its peers. Notice how the other indexes are close to their February lows, while IWM remains well above these levels. This suggests that the longer term strength in IWM is still intact, and that the Russell is still in a leadership role. IWM also held above its 200-day moving average on the first attempt of a test. As a market leader, IWM should be monitored closely to see if it begins to falter ahead of its peers.

IWM - may 21, 2010



Conclusion

Globally, the euro will be a major issue when U.S. Treasury Secretary Timothy Geithner and Chinese Vice Premier Wang Qishan meet this week for a strategic and economic dialogue.

Ahead of the gathering, Chinese officials said the euro's weakness means they are less likely to let their currency, the renminbi, rise in value, something U.S. policymakers have long agitated for. In sum, Europe's mess is further complicating an already highly sensitive sore spot between the worlds’ largest and world's fastest-growing economies.

Investors were certainly on edge last week as the markets continued to probe lower levels until reaching the crash lows.

While the reaction was positive for bulls, traders need to remain extremely cautious. While it’s tempting to rush in and start picking up bargains, relatively speaking, stocks were still showing weak performance this week. Many stocks are well under support levels and not looking healthy. Most stocks are oversold and could have a sharp bounce, but there will be many traders looking to cash in on stocks they have held through the recent weakness. This is what makes this environment dangerous, as traders will be tempted with sharp rally attempts only to be met with other traders who have been anxious to get out at better prices. The markets will need to consolidate much further before a healthy trend can emerge. Until then, traders should trade on shorter time frames or make the most out of movements with the options market.

Another concern is that the most recent American Association of Individual Investors' survey, released on Thursday, showed increasing optimism among those surveyed.

Continue to hedge your long positions during this volatile market environment. If you owned May put options as a hedging strategy, remember to buy more protection to replace the expired options.

Success is simple. Do what's right, the right way, at the right time.



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