Current Market Bullish or Bearish? Time Will Tell

The major market indices are all down around 3% for the month of May which coincides with the amount they are off from their recent recovery highs. As a percentage that really is not a lot to be concerned about.

However after a review of the most recent economic data the picture gets a little fuzzy. A few weeks back was the ISM Services report, which plunged from 57.3 to 52.8. Anything over 50 demonstrates growth, but the consensus was for an improvement to 57.8 and this obviously indicates we are heading in the opposite direction. It is important to note that 80% of our economy is dependent on the services sector.

On the manufacturing side of the ledger the situation actually looks even worse. The Empire State Manufacturing Index, the Philadelphia Fed Manufacturing and Durable Goods Orders all came in the last couple weeks at their lowest levels in many months. It clearly indicates that the rate of the economic recovery is shrinking and unless something changes, could fall into negative territory.

The Conference Board’s Index of Leading Economic Indicators reported its first negative reading in nine months, falling to a negative 0.3% for April. The much anticipated upward revision for first quarter GDP fizzled as it stayed at an unimpressive 1.8% this week. That is down from the 3.1% GDP growth reported for the fourth quarter of last year.

Meanwhile housing remains at depressed levels as prices continue to fall and sales of both new and existing homes are down in the double digit levels from a year ago. This occurred while the economy was actually getting stronger.

Emerging market and the so called BRIC countries (Brazil, Russia, India and China) are all down more than our markets which is causing some concerns among investors as many thought that the BRICs would lead the global recovery this year. With commodities off as much as they are, many of these resource rich nations have fallen hard.

Still encouraging the bulls is the fact that the Fed’s quantitative easing program still has a month to go. It doesn’t hurt stocks that the Fed kicked in an extra $31 billion in the last five days to the Primary Broker Dealers to do with as they please. Rumors that another round of quantitative easing may occur also helped juice the markets in the last couple of days. At the very least the bad economic reports lately are pacifying all concerns about an interest rate hike coming anytime soon.

Markets had also reached oversold levels this week and were due for a bounce. How big that bounce turns out to be remains the big question. On a technical level markets paint two opposing pictures. On one hand a breakdown of the uptrend from the March 16th low has occurred – which is negative.

However another obvious pattern in the charts is that of a flag formation. Flags generally fly at half mast. This means that there is likely a case for the markets to break out of the downward flag slope and most likely rise to even higher highs for the year.

It must be noted that the Dow has been down the last six years in a row in the month of June. However, there is a high propensity for markets to rise going into three day holiday weekends. Plus the end of the month may give the bulls some strength. So is the current market bullish or bearish? Time will tell.