May 11, 2010: Macro Market Reflections
May 11th, 2010
· During the two weeks (ten trading days) from April 26 to May 10, investors were bluntly but vividly reminded about various areas of market risk. An errant trade in PG allegedly kicked off a firestorm of computer-driven selling. During that window, major averages declined as follows: Dow 30: -12.33%, S&P 500 -12.63%, Naz 100 -14.91%, and Ru 2000 -14.51%.
· On Friday, a recovery in response to a stronger-than-expected BLS Employment number drove some stabilization and the averages closed relative to their respective April 26 bull market highs as follows: Dow 30 -7.80%, S&P 500 -8.93%, Naz 100 -10.20%, and Ru 2000 -12.46%.
· Russell 2000 was the second weakest of the four averages on the way down but staged the weakest recovery by Friday’s close. Naz 100 has been the strongest since index since its May 9 low with 11.20% rally while the S&P 500 has been the weakest from its May 9 low with an 8.93% rally.
· Currently, the Russell 2000 is up 11.86% for 2010 and up 104% from its bear market low fourteen months ago. The index set its bull market high on April 26 (as did the other major averages) at 745.95. Beginning in August 2007, the 750 area began to emerge as an important technical area. On August 6 and again on August 16, the index traded down through 750 reaching a low of 736 on August 16. That low reversed into a seven-week, 15.8% rally.
· The 750 area attracted buyers again in November and December as the index bottomed at 734.40 on November 27. The following rally, however, was a far less intense 8.9% over a four-week period.
· In June 2008, the role of 750 appeared to change from support to resistance. After three weeks of trying to break out up through 750 in May-June 2008, the index reached 763.27 on June 5. The index declined 15.2% over the next six weeks. The August 15 peak was 764.38 and the September 19 peak was 761.78. From the September peak, the index declined 55.03% over the next six months.
We believe the index remains extremely vulnerable to a meaningful and sustained downside reversal. The market assigned a great deal of value to the 750 area (734-764) during August 2007 to September 2008. Based on the index’s price action beginning in September 2008, our view is that index is very near significant resistance. We recommend using this strength to dramatically reduce exposure to Ru 2000 names. Technically, we believe there is risk down to the 550-575 area.