At Friday’s closing bell, the S&P 500 had fallen for its sixth straight session and was off 4.3% for the week. Stocks were down on the resurgence of Europe’s sovereign debt and banking crises and their impact on the world economy.
With the majority of Q1 earnings out of the way, headlines shifted rapidly back to Europe. With the emphasis on what now seems a probable Greek withdrawal from the European Union, other possible defections are being actively discussed — with Spain, where bank downgrades proliferated, being the top candidate.
It was hardly the climate to bring a new issue to market, even one as powerful as Facebook (NASDAQ:FB). Thus, the offering at $38 closed just a fraction above the “syndicate bid” of $38. Also on Friday, the DJIA fell 73 points to 12,369, the S&P 500 was off 10 points to 1,295 and the Nasdaq was down 35 points to 2,779. Volume picked up on the sell-off with 1.2 billion shares traded on the NYSE and 869 million on the Nasdaq. Decliners were ahead of advancers by 3-to-1 on the Big Board and 2.6-to-1 on the Nasdaq.
Click to EnlargeThe noted letter writer Michael Murphy wrote on Friday that “every single commodity is now trading close to or beyond the negative two standard deviation range. . .” And the dollar has traded up for 15 straight days. The S&P closed on Friday at 1,295, which is 38.2% of the October to April advance — a Fibonacci number.
And so if the market is discounting the Greece situation, which was well known to everyone, and is not yet taking into account a coming recession, Michael suggests that the “correction” has probably run its course.
He has a good record, and he could be spot-on correct. But I doubt it. First, technically, there’s no support at S&P 1,295. The first support begins at 1,285 and extends down to 1,264. It’s true that most initial corrections lose gas at around the 38.2% mark, but the downward momentum of this sell-off has been very strong, and the relative strength index has yet to reach the lows of November.
Click to EnlargeAlso, note that volume has fallen on the PowerShares DB US Dollar Index Bullish (NYSE:UUP) on recent pullbacks, telling us that buyers for the dollar are still in the wings.
Yes, the Europeans are good at “kicking the can down the road” and may have come up with some sort of stimulus that will satisfy the Greeks. But I’m not good at guessing what politicians will or won’t do. We’re hearing about the Greek parliament being split between fascists and communists — what more can I say?
The major support zone of the S&P is 1,264 to 1,285 with the 200-day moving average at 1,278, and a Fib 50% retracement is at 1,259. Somewhere within that zone I’m looking for a reversal. That’s my story — and I’m sticking with it.
