Monday, May 5, 2008

Stocks at Important Levels

Sentiment is such a misunderstood factor in markets, but it is now a very large part of the psychology and direction of stocks. On Monday, the Dow quickly dropped below the 13,000 level and stayed there, after an early rise and subsequent fall on Friday.

This, with the other indices moving in in unison is a dead give-away for a significant shift in sentiment from bullish to bearish. It's not difficult to comprehend, as stocks have been on an upswing since March 10, and with earnings reports all but complete for the quarter, there's little on which to hang a resumption of the rally.

The levels important to investors over the near term are: Dow 13,000 (already breached to the downside); S&P 1400 (holding just single digits above); NASDAQ 2500 (failed at 2499 on May 2) and potentially the most overlooked, NYSE Composite 9500 (failed at 9496 on May 2).

Dow 12,969.54 -88.66; NASDAQ 2,464.12 -12.87; S&P 500 1,407.49 -6.41; NYSE Composite 9,438.10 -13.07

Once the S&P drops another 7-12 points, the index superfecta will be complete and investors will begin taking profits in larger quantities. With summer coming, the dominant sentiment will return to negative for four reasons: 1) the market is essentially overbought; 2) high gas and food prices are crimping spending and that is becoming a worldwide phenomenon; 3) the employment situation is, by any standard, deteriorated and possibly worsening; and, 4) housing and credit markets are still in crisis.

The balance of this week will likely determine market direction for the rest of May, June and probably well into July.

As noted, stocks were sent lower just about right out of the gate and stayed in negative territory all session long. Declining issues took command over gainers, 3512-2700. New lows outstripped new highs, 161-116, reversing Friday's decision, which was only the fifth time since October 31, 2007 that there were more new highs registered than new lows.

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After last week's respite, oil continued its relentless ascent, closing at another record, $119.97 per barrel, up $3.65 on the day. Gold caught onto the updraft, gaining $16.10 to $874.10, as did silver, up 37 cents to $16.83.

Tomorrow and Wednesday's should be critical. If the markets cannot move higher, the stage is set for a two-to-three-month low, testing the bottoms made in January and March. If the recession is really already here and the US economy is indeed in a trough, this could mark the bottom. However, there are still critical issues and hurdles to overcome - housing, interest rates, inflation, labor, gas, food, politics - which will all play a role in determining whether the economy can bounce back or continue slumping.

NYSE Volume 3,360,579,250
NASDAQ Volume 2,085,020,750

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