Market Comment - May 11

(Marco Bonelli) Do you believe in symbolic meaning?

The announced $2Bln loss of JPM's CIO portfolio tells a lot of stories. Although it could be seen as a unfortunate one-time occurrence that will put a dent into Q2 earnings, it almost certainly reflects on the health and the management of the supposedly healthiest and best-managed bank, it raises the question if similar "grievous" mistakes were made at other banks as well, it clearly questions the effectiveness of regulations overall but probably most importantly, it sends a classic reminder of what investors might face in the Q2 reporting season.


Estimates for Q2 earnings growth dipped again into negative territory and recent reports and guidance from CSCO, KSS, JWN and now JPM just confirms that it will probably be very difficult to repeat the miracle of Q1 (8.85% reported earnings growth for the 456 S&P 500 companies after expectations of almost zero), considering many low-quality earnings beats in Q1, an almost record numbers of profit-warnings for Q2, roughly flat revenue growth and an overall weaker economic environment in the US and globally in the current period compared to the first three months of the year.

This, as only one example of the fundamental reality, appears to limit any sustainability of and any excitement about a counter-rally, an over-sold bounce, a technical rebound, a buying-the-dips action or however you call it, no matter how much the media gets wound up. "Stocks advance as Euro rebounds after 8-day drop, copper, oil rise" was one of the Top News Stories on Bloomberg over the entire trading day, although it only described the first 45 minutes of the trading session as commodities peaked at 9.40am, the SPX at 9.51am and the Euro at 10.12am.

12754 for the Dow Jones and 1356.50 for the SPX remain critical support lines, both levels were the highs from July 2011. CSCO contributed to further underperformance of the technology sector and with that the Nasdaq; as both Nasdaq indexes broke below their April lows, 2900 (and 2887.75 from May last year) remain critical supports for the Composite and 2575 for the NDX. Still, one of the most important support levels among the major averages remains 350 for the Value Line Index, the point where the index closed right at yesterday and which will be broken in the opening for the third time in four days. A confirmed break would not only push the index back into the August - December trading range from last year, it would also conclude a head-and-shoulder formation with a calculated 7% downside potential.

As long as the market lacks leadership and breadth, as long as there is no follow-through buying after any kind of rebound and as long as volume picks up on the way down and dries out on the way up, the market needs a much stronger support than any of these short-term levels, traders tried to play during the last days or a reversal of the news-flow to the better, in order to stage a more sustainable rally - both are barely visible at the moment.

Trade well and have a great early-summer weekend.


(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)