A Summer Break; Why It May Be
Time for Investors to Take One
Monday, August 1st, 2011
By George Leong, B.Comm. for Profit Confidential
It was not what traders were hoping for, as the second-quarter gross domestic product (GDP) came in at a meager 1.3%, well below the 1.7% estimate. And making matters worse was a downward revision in the previous first-quarter estimate to a dismal 0.4% from 1.9%.
My economic analysis is that the GDP reading clearly indicates a country that is in trouble with a stalling economy. What really concerns me is that continued weakness in housing and jobs on Friday will hamper the situation further. While all of this is going on, the government continues to debate on increasing the debt ceiling before August 2 or risk the event of a default. I do expect a resolution and not a default, but the fact the ceiling will rise for the second time since January is troublesome.
The DOW has closed lower in five straight sessions to July 28. The DOW, S&P 500, and Russell 2000 have all breached their respective 50-day moving averages. This is bearish and could drive stocks lower. As I have said, I expect stocks could continue to trade in a sideways manner for the remainder of the summer.
The breach is bearish and may signal additional weakness if buying support fails to emerge. The S&P 500 is also below a key technical support level at 1,340. I’m seeing some exhaustion on the charts and potentially more downside weakness.
The selling may not be over, as the near-term technical signals are bearish, along with the weakening Relative Strength.
There continues to be a red flag, as the associated trading volume remains light on up days, which fails to help confirm a strong buy signal. Unless there is increased volume on the up days, I question the lack of mass market participation in the current rally.
Recall what I said at the start of May? “Did you realize that the best part of the year for making money is over? The period from November to April has historically represented the best six months of the year for stocks, according to the Stock Trader’s Almanac.”
This appears to be the case. Yes, the second-quarter earnings have been decent, but the guidance has not delivered to the point where I feel that corporateAmericais ready to take off. Of the 279 S&P 500 companies reported as of July 28, 72% beat estimates and 18% fell short, according to Thomson Reuters. Yet the blended growth rate for the S&P 500 is 10.2% so far, well down from the 13.3% as of April 1. The growth rate is somewhat troublesome.
At this juncture, the near-term upside potential appears to be limited unless there are new reasons to entice traders to buy. A debt resolution will help but, at the end of the day, it means adding more debt to an already massive debt load. And when interest rates rise, the mere mention of the colossal interest rate payments will be scary.
Maybe it’s time to take a summer break.
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Tags: economic analysis, economic news, GDP, S&P 500, second-quarter earnings, US Economy Analysis
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.




