MAYDAY

Thankfully May has come and gone but it has left a trail of blood on Wall Street.  For the month, the S&P finished down over 6% with the other major indices posting even larger losses.  Volatility has picked up significantly with wild daily and intraday swings.  Catastrophic declines often happen when the markets have declined enough to get all investors to consider selling.  We are at that point and all it would take is a trigger event to push us over the edge.   We are certainly not calling for a catastrophic decline but there are an uncomfortable number of such potential trigger events. 

Today's economic news disappointed on all fronts and the markets sold off before finding a footing and attempting to break even for the day.  Tomorrow brings the much watched jobs report (every indication points to it being weaker than expected) so the bulls will likely have to hold their ground again tomorrow to avoid another run at the lows of a couple of weeks ago.  The low of March 18th (1295 on the S&P) is a line in the sand that the bulls will have to defend to avoid another air pocket where we could see another quick 3-4% decline.  Of course, the Fed and the ECB remain in the background where it is anybody's guess when (if) they will step in with more market liquidity.  When (if) that happens, we will see a powerful rally back up to the highs of this year.  In the meantime, we are in a treacherous environment and the risks of being in the market far exceed the benefits.  For the month, our portfolios have declined less than 1% as we have maintained a defensive posture for the last few weeks.  We will continue that stance until we get more clarity.    

RIGHT ON CUE

As widely expected after over two weeks of losses, the markets bounced back today with large gains in all the major indices.  Just before the market close, the S&P is up 1.6%.  As we have mentioned here and in our bi-monthly newsletter, the bounce, while important, is not conclusive that we have seen the bottom.  The key will be if the markets can hold onto these gains for the next few days.  We will have much more confidence in the rally today if the gains can be kept and if the next down turn can be met with buying.  Now it gets interesting...

MASSIVE TOP IN GLOBAL MARKETS

MASSIVE TOP IN GLOBAL MARKETS - Louise Yamada is one of the most respected market technicians and we always listen to her analysis.

IPO MANIA

Tomorrow marks the long awaited Facebook initial public offering.  Will it make a difference to the overall negative tenor of the market?  After today's 1.5% decline, the S&P is down over 8% since the correction started on April 2nd.  As we mentioned in our March 27 newsletter, "Which do you think more likely - another 10% rise or a 10% correction? We would guess a correction."  Unfortunately, our comments now look timely and prescient as we are nearing that 10% mark.  The market is very oversold and due for a bounce of some sort.  With options expiration tomorrow and the excitement generated by the Facebook IPO, the bulls may get their long awaited reprieve.   Much technical damage has been done over the last few weeks with multiple levels of support broken.  It will take much more than a one or two day rally to overcome the damage done.  When the bounce comes (and it will at some point), the move may be explosive and create all kinds of buzz on CNBC and the other financial networks.  However, the true test will be how the market acts once the initial flurry of buying (or short covering) has run its course.  That should happen within a few days and then we will see if the downtrend that started 45 days ago has more to go to the downside.

There are many reasons to be cautious now and we have significantly lightened up our portfolios over the last few days and weeks.  We are currently raising cash and waiting for the next buying opportunity when the odds are in our favor.  As our sell stops are hit, we will continue to liquidate positions until this market stabilizes.  

ECONOMICS TRUMPS TODAY

The widely watched and anticipated jobs report was released this morning and showed a disappointing 115,000 in job gains.  Though the unemployment rate dropped to 8.1% (from 8.2% previously), that figure is dropping more from workers leaving the work force or abandoning their job search than an actual reduction in unemployment.  All in all there is very little to like about the numbers and Wall Street punished stocks with one of the worst days in the last 6 months.  The NASDAQ led the fall as it shed 2.25%, the S&P lost 1.61% and the Dow rounded out the major indices by finishing 1.28% lower. 

After approaching the top of the trading range formed over the last month, the market is now trading near the lower part of the range.  Mondays after the job report often reverse some or all of the initial reaction so we will have to see if that holds true here.  Until such time as the market breaks through on the upper or lower end of the range, much of the day to day movements are just noise.  Today was a little louder however and the continued hint of a slowing economy puts the bears firmly in control heading into next week.  We'll see if the generally very good earnings continues next week and if it can shift the balance once again.  Spain and the rest of the European issues continue to smolder so there is reason for caution.  Will "sell in May and go away" prove prescient again this year?  It has for 8 of the last 11 years so we shall see. 

Our portfolios have held up extremely well and should again today with high yield and municipal bonds generally up a little or down a little today.  As always, please call us to discuss your individual accounts or if you would like additional information about Bills Asset Management.