A Look at What’s Happening in the Markets

by George Leong, B. Comm.

There was some selling pressure last week, with the DOW recording two triple-digit losses. Yet the markets are managing to hold above the breakout levels (NASDAQ: 1,700; DOW: 8,400; S&P 500: 900-950; Russell 2000: 475). The overall market is moving lower. As of June 18, about 70% of all U.S. stocks are above the 200-day moving average, down from 74% a week earlier, but up from 55% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving average continuing to trend higher.

There are some key levels to monitor over the next few days or weeks. The DOW is below both its 20-day and 200-day moving averages. The NASDAQ is hovering just south of its 20-day moving average — and you should watch to see if the 50-day moving average at 1,729 holds. The S&P 500 is below its 20-day moving average and sitting at just above its 200-day moving average of 906. On the small-cap side, the Russell 2000 broke below 500 last week for the first time since May 29. The index is below its 20-day moving average, but look for support at the 200-day moving average of 495. Along with the breakout levels, there are key levels to watch going forward.

The ability of markets to hold above the breakout levels is encouraging. The last thing we wanted to see is continued selling today, as the various indices are at key moving averages, as we indicated.

The CBOE NASDAQ Volatility Index (VXN) has been on a decline. The current trend is down and indicates less volatility, albeit the recent readings indicate increased near-term volatility. The CBOE S&P 500 Volatility Index (VIX) has also been on a decline. The current trend is down and indicates less volatility, but watch for some near-term volatility given the recent readings.

A positive is that consumer and whole inflation remains in check. The recession is keeping prices down. The importance of reduced interest rates cannot be stressed enough for an economic recovery.

The current investment climate is more encouraging now than it was a few months ago. We are seeing continued evidence of economic renewal in the U.S. and in other major global markets. The International Monetary Fund (IMF) came out and upgraded its growth estimate for global regions, which will add to the optimism that the recession will end later this year. Yet be mindful that this does not mean the economy will suddenly take off, since it may not be until mid 2010 that we’ll finally see some stronger growth

The reality is that much of the rally has been driven by optimism towards economic renewal this year, yet there remain growth issues and a sense that stocks have edged too high too soon. The economy must continue to deliver positive news to show progression, otherwise stocks could retrench to below the breakout levels.

Watch for the Fed’s meeting on Wednesday. We do not expect a change in the short-term interest rates. I expect markets will continue to trade mixed.