The S&P 500 moved lower on the week, creating the second straight weekly decline in the index since November. Arguments for why exactly these declines are being seen come from a few different directions. On one side, we have the continuing story that the US Federal Reserve has altered its bias, and is no longer expressing concern for certain fields of macroeconomic data. On the other side, we have the historical tendency for traders to base trades on a “summer vacation” mindset. This typically means investors will take their profits into the late spring and remove positions until liquidity returns in the fall. Both of these arguments are bearish in terms of the ways they affect markets, so it is not entirely surprising to see prices pull back from their elevated levels.
Utility companies and telecoms were some of the biggest losers in the retreat, with Verizon and Exelon Corp. seeing drops near 6% into the Friday close. Financials and tech stocks were the only bright spots, as the other 8 industry groups were lower on the week. Moody’s raised its outlook for the US banking system, and this helped some of the biggest gainers on the week (Bank of America and Morgan Stanley).
Long Term View
Overall, the S&P 500 was lower by 1.1% on the week, which saw slow increases to volatility early on. Markets were closed Monday for the Memorial Day holiday, and this contributed to the sluggish nature of the mood for the week. Yearly gains in the S&P are now seen at 14%, after gaining 2.1% in May. This is the seventh consecutive month of gains, an event which has not been seen since Sept. 2009. The Dow fared slightly worse after falling from its May 28th highs near 15,410.
At this stage, it makes sense to look at long term trends and perspectives, given our proximity to the summer trading sessions. Markets continue to trade at elevated levels, with very little to be seen in the way of corrective retracements. This places risk to reward ratios in favor of sell positions for those looking to play the benchmark indices.
Chart Perspective
Bank of America (BAC):
BAC is showing a very strong rally after posting its 2012 lows in the 5.00 region. Long term highs are not seen until markets meet resistance above 15, so there is significant upside potential into the later parts of this year. The stock is a buy on dips as long as historical support at 11.30 remains intact.
Morgan Stanley (MS):
Morgan Stanley is looking impressive as a medium to long term buy, with prices rising above the 78.6% Fib retracement and proceeding forward with a well-angled uptrend channel. Long term target is now seen above the 30 level, and traders should view any dips as a renewed opportunity for buy entries. First support can now be found at 25.70, and this area can be use to start establishing long positions.
