We’re about to find out if my “gut” has been right, or if the pivot point I’ve been talking about is really a springboard for stocks to go a lot higher.
The roughly 4.3% drop in stocks only a few short weeks ago, and their subsequent bounce back, set up a pivot point halfway back to the highs of late March and early April.
So far the pivot point is looking like a staging ground for a rocket launch, as we’ve kept moving higher, seemingly with little resistance.
At least that’s what it looks like to most people, especially analysts and market pundits.
I’m not convinced.
I’m sticking with my gut. I’ve been telling you I don’t trust the rally.
I’ve been saying that from the pivot point, we’re either going to go higher and test the early April highs, or go lower and test support levels established in early March.
Well, we’re headed towards testing the old highs.
On the Dow Industrials, we’re getting very near. We closed Friday at 13,228, and we’re very, very close to testing late-March, early-April closing highs of around 13,264-13,269 and the Dow’s intraday high of 13,297. These will be major tests.
If we fail to break out and instead meander lower, we could drift down to the 12,734 bottom channel line and maybe test 12,700. If we break 12,700, we’ve broken the back of the rally in the Dow.
The S&P 500 closed Friday at 1403. Its resistance is at 1422. It’s very close. If it doesn’t break out, it’s got support at 1358 down to 1340. Below that, it might be dicey.
And the Nasdaq Composite, after closing at 3069, is looking up to 3122 and then 3134 to break out. It’s interesting to me that the index with the greatest weightings of Apple and Amazon (last week’s rocket stocks) has the furthest to go to break out. Go figure. If the Composite doesn’t continue its strength this week, it could head back down to fill a gap at 2979. It has support at 2940 and strong support at 2900. If it breaks that… take the summer off.
I’m the first one to admit when I’m wrong, which I’ll do if we break out in the next few sessions, or Monday for that matter. But of course, I won’t be wrong, because it will be my gut that was wrong, not me (that’s a joke).
Why is my gut so queasy? Because I feel like there’s something out there, something’s coming. I don’t know what it is (I could speculate, I have some ideas), but it’s out there.
It’s not here. Here in the heartland, things aren’t great on the GDP front, but at least we’re not double-dipping like the U.K. is now, after its first-quarter GDP dip came on the heels of a dip in the fourth quarter. Two consecutive quarters of negative GDP growth constitutes a recession, folks.
Looking through our GDP numbers for the first quarter, which were disappointing to say the least, there are some ugly underpinnings of stalling growth. After all, we slowed from 3% growth in Q4 to 2.2% growth in Q1.
What’s ugly? We had a 2.1% drop in non-residential fixed investment and spending on software and equipment rose a paltry 1.7% in Q1 after rising 7.5% in Q4. That’s a huge slowdown. Consumer spending slowed to 3.5% growth year over year. Which sounds okay, but isn’t good coming from recession lows. And what really worries me is that disposable income grew only 0.4%, while the savings rate dipped to 3.9% (lowest since 2007), down from 4.5%.
So are consumers borrowing from their savings and on their credit cards to consume? Yes, they are.
However, My Biggest Worry Remains Europe
I know I sound like a broken record. But, hey, if I’m right, I’m not the kind of guy to say I told you so. But maybe I will (that’s not a joke).
Seriously, we’ve got fringe politicians challenging the paper walls that have been erected to ring fence Europe from itself. France has its runoff on May 6; we’ve got Greek elections coming up; and all, as in ALL the peripheral European countries, the ones in serious trouble, are in bigger trouble since the start of the crisis in 2010.
All of them are now facing record unemployment, or very close to it. All of them have to pay more interest on their national debt now than in 2010, and all of them have a higher debt-to-GDP ratio than they did in 2010.
Oh, and Europe’s banks…
They have to come up with $152 billion by June (yes, this June) to meet new capital adequacy ratios of 9%. If they don’t – and good luck with that – they’ll have to shed, oh, about $3 TRILLION of loans and assets (those are the IMF’s figures, not something I pulled out of my… ear).
And of that $152 billion, 70% is needed by the banks in Europe’s periphery. Yeah, those banks in those countries that are already reeling. Good luck with that.
So, that something I think is coming, well, we can hear the footsteps. Are you listening?
By the way, I hope you appreciate that I go “all out” in my calls. I don’t mind being wrong (actually, I HATE it), but if you don’t have conviction, you don’t have credibility.