State of the Stock Market Analysis for the Week Ending May 17, 2014 (Stock Market “Par for the Course” 5-17-14)
Market Closes Par for the Course

Stocks managed to rally back from their morning and mid-day lows, and close Friday with all three of the major indices in the green. We may have seen small gains for the day on Friday, but at least we finished what had been a tough week with a win. When the dust settled on Friday, the major indices had posted a weekly loss of 0.5% for the Dow, a 0.5% gain for the Nasdaq and a basically flat performance for the S&P 500. It was sort of “par for the course” for a week that was characterized by mixed earnings and mixed economic numbers.

What was a plus on Friday was seeing the S&P 500 dip down to touch its 50-day moving average at 1,864 and then work its way higher into the close, where it closed out the week at 1,877. The bulls did not want to head into the weekend with the S&P 500 below its 50-day moving average, so it made for a good way to end the week. Bulls had been very optimistic early in the week when the S&P 500 poked its head up above 1,900, and traded as high as 1,902, and the thought was that we might have seen a strong, upside breakout to higher highs. That would not be the case this week, but at least it held above its 50-day moving average.

The Nasdaq, on the other hand, is still having a bit of a struggle. It may have had a 0.5% gain for the week, where it closed at 4,090, but it remains below its 50-day moving average of 4,142. Some of the high-flying and big-cap tech names are under pressure, and they are just unable to get the monkey off their backs. Likewise, some of the big banks are weighing on the Bank Index (BKX), which is trading below its 50-day moving average. It will be difficult for the S&P 500 to get back above the 1,900 level without big tech and big banks on board, so we will continue to monitor these sectors closely.

Some market strategists have brought up the fact that despite the Dow and S&P 500 hitting new highs, the Russell 2000 (RUT) small cap index has also been deteriorating. If you look at the chart for the Russell 2000, it is clear that it is floundering. It closed Friday at 1,102, which is below both its 50-day moving average of 1,137 and its 200-day moving average of 1,106. The Banking Index closed Friday at 66.81, and while it is below its 50-day moving average of 69.09, it did manage to hold ever so slightly above its 200-day moving average of 66.69. We will continue to monitor this strange divergence in the days and weeks ahead.

The good news Friday was that nice jump in housing starts that came in for April at 1.072 million units, topping economists’ estimates of 980,000. It was also a big improvement on March’s 947,000 and a bright spot for economic news to close out the week. Consumer sentiment, on the other hand, fell to 81.8 versus the expected 85.0. It was down from last month’s 84.1, and it just added to the “good news, bad news” state of the economy. It also might explain why the stock market is unable to figure out which way to move at this juncture.

Bulls are hoping that a Summer Rally is quietly building up steam and that it is only a matter of time until it shows up. We are going to need some good economic numbers and very few earnings or revenue disappointments, though. Hopefully, those factors will fall into place in the coming weeks. The major indices are still relatively flat for the year, but following the torrid gains we saw in 2013, it was maybe to be expected. At the start of 2014, the stock market had priced in a lot of positive expectations. The market has met most of those high hopes, but we simply have had enough shortfalls that stocks are merely holding their own right now.

We were looking for direction this past week, but we ended up mixed and flat. Maybe we will get some clearer answers next week. In the meantime, enjoy a restful May weekend. This week was neither good nor bad, and the longer the stock market “thinks” and the longer the market is flat, the more resounding the move is when it finally decides which way to move. Again, have a wonderful weekend, and we will be back in action Monday morning!

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