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We began the week on shaky ground and we didn't see much improvement until Friday. We gapped up fractionally on Monday, then sold off into several ugly economic reports. There was no news on Monday, but the bears were still able to seize control heading into the close. That might partially be explained by the fact that key housing reports were due out on Tuesday (Existing Home Sales) and Wednesday (New Home Sales). Market participants remember well what types of reports we've been seeing in the housing sector. It's quite possible that traders simply wanted no part of equities as we headed into Tuesday. We mentioned last week that a lot of bad news is already baked into current equity prices, so we found it as no major surprise that the market reacted quite favorable to two of the worst housing reports we've ever received. It tells us that the market has already priced in a ton of bad news. On Tuesday and Wednesday, both housing reports were released at 10am and the lows in the S&P 500 occurred right around the 10am EST timeframe. Traders gave a HUGE sigh of relief once the reports were behind them. Although the market did experience more weakness late in the week, we never really moved much below the Wednesday 10am EST low. The economic news improved on Thursday and Friday as initial jobless claims on Thursday fell more than expected and the 2nd estimate of Q2 GDP was "only" revised lower to 1.6%, instead of the 1.4% that analysts were expecting. That set the stage for strength in equities as we ended the week. The yield on the 10 year treasury climbed from 2.42% as of 10am EST on Wednesday to 2.65% by Friday's close of the bond market. That was a very significant increase in rates and that helped to spur equities. For the second week in a row, the Russell 2000 led the advance. It wasn't earth-shattering, mind you, but relative strength is relative strength and the bulls will take anything they can get right now. The Russell 2000 gained 0.98% for the week, while the other major indices fell. The NASDAQ was the weakest, losing 1.20% mostly because of a weak technology sector. Industrials and technology were the worst performing sectors, dropping 1.47% and 1.45%, respectively. Technology stocks are barely edging out energy stocks or they'd be the worst performing sector year-to-date. We have to sit back and wonder why technology stocks are so weak. If the market was anticipating an improving economy, technology would be doing well on a relative basis. So, at a minimum, the market is sending mixed signals about our economy right now. Technically, the 20 day EMA is below the 50 day SMA and the 50 day SMA is below the 200 day SMA across all of our major indices. This doesn't happen when markets are healthy. While the end of week reversal was nice to see, no one should mistake it for any type of long-term bullish sign. We were oversold and we bounced. At this point, we wouldn't read anything more into it. We do have room to move higher in the near-term, perhaps as much as another 2-3% before we stumble into key price resistance levels and major moving averages. Look to financials for relative strength if you're bullish. Last week, financials performed in-line. That's better than underperforming, which we've been growing rather accustomed to. The Dow Jones US Financial Index hit a MAJOR price support level at 240 on Wednesday and bounced. In our Market Chatter to Premier members on Friday, we suggested a possible trade using the UYG (ProShares Ultra Financials), which tracks the Dow Jones US Financial Index at a 200% clip. Our reasoning? If the DJUSFN lost 240 price support, you could exit with minor losses. If, however, that major support area held, significantly more reward potential existed. Financials did finish fairly strong on Friday. Now we'll have to see if that strength carries into a new week. For similar reasons, we discussed in our Wednesday Market Chatter that the time to short bonds was that day. Why? Again, it was because the 10 year treasury yield was at a MAJOR support level. If the yield bounced at support (with bond prices falling since they move inversely), a short position on bonds would do quite well. The yield not only bounced on Wednesday, but it ran seriously higher throughout the balance of the week, sending bond prices much lower. If the bond market continues trending lower to start the upcoming week, it will help provide the boost the bulls need to carry equity prices higher.
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