Thursday, 7 June 2012

PRE-MARKET (June 7th 2012): New Cycle or Sucker's Rally?

PRE-MARKET for US trading on June 7th 2012.

The big question being asked by investors since last night: What was with that rally?

At Big Macro Picture, we're always interested in SHORT TERM analysis of market levels to see where we stand within a MEDIUM TERM cycle. Gradually from late February onwards, we saw increasing concern voiced by leading market and economic indicators, effectively leading us into a new month-to-month bearish phase. So how does yesterday's rally fit into that?

Here's our first thought: The 200 Day Moving Average on US indices tends to put up a fight when the market tries to break through for the first time. After closing below it earlier this week, it's perhaps little surprise to see volatility around those levels (1284 on S&P, 12271 on DJIA). Our first immediate pit-stop on the Dow was 12323-12350, noting the resistance above it at 12400.

However, closing at 12414 at the highs of the day, that resistance seemed to be brushed aside. Does the sheer strength of yesterday's market indicate a strong rejection of the 200MA? Was there anything more to it than technical reasons (Art Cashin suggested a reverse head and shoulders formation coming out from heavily oversold levels)?

Charts as usual from the excellent

From what we can gather, the rally was also justified by: Big Ben Testifying Today and by extension, A Lot of Short Covering. I think it's fair to say that resistance around the 200MA, the short-term oversold market conditions, and then the worries (followed by panic) of weak short positions closing out, all conspired to drive the market higher. Not to mention, inevitably, both Momentum Traders and other Investors "Panic Buying-Back Their Stocks" in some cases, helping the Dow close up 286 points.

So is this a Sucker's (or Short Covering) Rally? Or is the market pre-empting a recovery in economic conditions, and a new MEDIUM TERM bullish phase into the summer? Unfortunately, the answer is a bit of a cop out - we can't say for sure how far this momentum will take us, or if the leading economic indicators will point to better conditions and justify any rally retrospectively.

However - from the perspective of our MEDIUM TERM analysis, apart from market technicals and the prospect of Big Ben giving the market's a significant confidence boost, we simply stick to our assumption that we are still in a MEDIUM TERM (month-to-month) bearish phase within a 2009-present LONG TERM bull market. There is no change in our view of economic or market conditions from yesterday - and we still await any signs of those indicators bottoming out.

Being agile and objective - ie we are not permanent doom-mongers or permanent market optimists - it will take more than the market action on June 6th to convince us that a new cycle is underway. You'll be the first to hear it if we change that MEDIUM TERM view, right here on Big Macro Picture.


Trading in Europe this morning has continued Wednesday's momentum overnight. In terms of our SHORT TERM analysis of market levels, we're interested in how the US indices react as the market opens. So far, futures are indicated to open higher - we're looking at 12490-12530 above us on the Dow to see where how momentum fares. Beyond that, 12600-12686 would prove pivotal, especially around the previous swing high of 12611 if we eventually got that far. Below us, 12350-12323 remains significant, and we might expect the 200MA at 12271 to act as a magnet for the Dow in the event of a sell-off.

Ben Bernanke testifies this afternoon - we expect some degree of volatile, unpredictable market movements as traders speculate on the likelihood of more QE. We're cautious of making any decisions in and around that time period - but in terms of our MEDIUM TERM analysis, our views will not change based on the wording of Bernanke's speech at 3pm (GMT).

While we also will be watching for weekly US Unemployment claims at 1.30pm (GMT), we don't expect the market to react too strongly unless we have a significantly unexpected number.


Today is fairly quiet for our leading economic indicators. We will review these on the site at the end of trading today, but none of the three releases are especially important to us at the moment in terms of our cyclical economic analysis.


UK Services PMI - released earlier this morning, unchanged but better than expected. Far stronger than UK Manufacturing data but seemingly has still peaked for the time being, with no signs of a new trend forming.

US Weekly Unemployment Claims - released in a few moments time, bulls will want to see a much lower number than last week. We're more interested in the overall trend than any individual number, which has been gradually worse since February.

Canadian Ivey PMI - released at 3pm (GMT), this is not the most useful month-to-month indicator, but a continuation of the trend in April and May would only add to argument for bearish MEDIUM TERM cycle. Bulls will want a significantly better number than last month to indicate some stabilisation.

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