There were no proverbial May flowers this year when it came to the stock market, with the month showing the worst decline since September 2011. The NASDAQ fell 7.19% in May and 8.54% from the end of the first quarter. The DOW, S&P 500, and Russell 2000 lost over six percent in May. The DOW is up a mere 1.49% for the trailing 12 months, but will likely see a move to negative territory based on my stock market analysis. On Friday, the DOW broke below its key 200-day moving average (MA) of 12,250. This is a red flag.
My stock market analysis suggests that the technical picture is bearish and there could be more potential losses especially if a base is not found. As such, based on my stock market analysis, I would be hesitant to add long positions at this time. What will likely happen is that there could be an oversold bounce, but my stock market analysis view is that this is an opportunity to sell into it, as the upside sustainability will likely continue to be an issue. The key stock indices have been devoid of any momentum or signs of sustained buying interest.
The overall Relative Strength is weak, indicating that there may be more downside moves or that the upside gains may be limited, based on my stock market analysis.
The breach of the 50-day MAs was bearish, but a move below the 200-day MA would be a big red flag and renewed weakness on the charts, according to my stock market analysis.
The underlying strength, as indicated by the advance-decline line for both the NYSE and NASDAQ, has been trending lower since the start of May—indicating a loss of momentum.
My stock market analysis is that there could be more downside moves before stocks find some sort of base.
The lack of any positive news is driving the negative sentiment and desire to sell.
China and the eurozone remain major areas of stock market risk with more bad news last week. China’s purchasing managers’ index declined to 50.4 in May from 53.3 in April. This suggests reduced domestic and foreign demand for Chinese-made goods.
In Europe, the Markit Eurozone Manufacturing PPI was a horrible 45.1 in May. Spain and Britain are in a second recession and the eurozone could also jump in.
Not only is the lack of jobs an issue in the U.S., where an extremely disappointing 69,000 new jobs were generated in May, but also the situation in Europe is much worse. The unemployment rate across the 27-nation European Union was 10.3% in April, while 11% of people in the eurozone are looking for jobs. Without jobs creation and with the threat of losing your job, spending will be curtailed.
My stock market analysis indicates problems in the eurozone and their negative impact on China. Should China sink further, the impact would be disastrous and may be enough to drive another global recession.
Just take a look at the recent U.S. first-quarter gross domestic product (GDP) reading (second estimate) at a soft 1.9%, below the 2.0% estimate and the 2.2% in the first estimate.
The Chicago PMI was 52.7 in May, below the estimate of 57.0 and the 56.2 reading in April.
Notice the downward trend here?
The reality is that the eurozone will continue to be the major risk factor, but what we saw in the U.S. jobs and economic reports indicates that there will be more to worry about and that’s not good for the upward potential of stocks as we head into the slower summer months.