PowerTrend Brief: The Tea Leaves for the Market’s Next Move

Even though this morning’s equity futures are signaling an up day today, there are a growing number of reasons to be concerned near term following the late drop in the market on Friday. As I’m sure you are aware, in the last two hours of Friday’s trading, the S&P 500 fell 1.42%, just shy of 24 points, and that capped the S&P 500’s gain to 3% for the month of May. While the S&P 500 exited May up 14.4% on a year-to-date basis, the last several days have raised concerns as to what lies ahead for the stock market near term. Helping fuel that is the “larger” 2% pullback in the S&P 500 since its recent peak on May 22 — combined with what I would call spotty economic data.

Weak Europe, weakening China and a softening U.S. economy. We learned this morning that HSBC’s May reading for manufacturing economy in China contracted for the second consecutive month and manufacturing in the euro zone has been in contraction territory for 22 consecutive months, per Markit Economic. I’d point out the May HSBC reading for China’s manufacturing activity was the lowest since last October. Also this morning, we received the ISM’s Manufacturing Index for May which, with a reading of 49, points to a modest contraction during the month. Worse yet, the new order component fell to 48.8, its lowest reading in several months to signal more bumpiness ahead. Those data points will raise concern about slower global growth in the coming months.

Redemptions, with weakening spending and saving. Adding fuel to that fire, hedge-fund SAC Capital is facing $3.5 billion in redemptions, which will force the firm to liquidate positions. If history holds, redemption of shares of this magnitude will have ripple effects. All of that follows the weak April personal income and spending report we received last Friday. With consumers continuing to save less and less each month and disposable income eroding, there is growing concern about the ability of the consumer to continue to spend. That sentiment was echoed by worse-than-expected store comparisons at Target (TGT), Wal-Mart (WMT) and others in recent weeks.

Potential for more market declines ahead. While I am more of a fundamental investor, I do keep an eye on the charts for several stocks, as well as the major market indices. Looking at some of the more basic charts for the S&P 500 and the Dow Jones Industrial Average suggests there is another 1.6%-1.9% to go until the indices hit their respective 50-day moving average support lines. A similar back-of-the-napkin analysis implies the potential support level for the Nasdaq Composite Index to be 3.5% lower from Friday’s close.

S&P 500

Dow Jones Industrial Average

Nasdaq Composite

Later this week, we’ll get the all-important May Employment Report. I’d note that, as we head into the trading week, the current expectation for nonfarm payrolls in May — the Labor Department’s employment data — stands at 171,000 positions, with estimates ranging between 145,000 and 200,000. For perspective, the April ADP employment report came in at 119,000.

What concerns me with this particular employment report stems from Gallup’s recent findings that show more U.S. small-business owners report letting employees go than hiring them. Between now and the Labor Department’s tally for May, we’ll also receive ADP’s Employment Report for May, as well as the Challenger Job Cuts report. Historically, surprise or disappointment with these figures can cause some expectations adjustments.

Positioning yourself for what may come. If you attended the Las Vegas Money Show, you may have seen my “5 Secrets of Wall Street Fat Cats” presentation and learned that hedging your positions and gaining the ability to generate positive returns in a down market are some of the key ways hedge funds generate positive returns, no matter what is going on in the market.

That’s exactly the course that I and subscribers to my trading service ETF PowerTrader have taken. Through last Friday’s market close, the average return on closed trades has been more than 69%. If you’d like to learn what we’re doing and how we aim to profit from it, click here.

PowerTalk with Valpak — Finding deals on your smartphone & online.

As I mentioned above, the consumer continues to be hurting. That means you and I are looking for ways to save where we can and get a good to great deal if that’s possible. At the same time, technology continues to transform business models and how we look for those saving opportunities. That’s why I was thrilled to talk with Michael Vivio, president of Cox Target Media.

Now, you may be scratching your head, wondering what kind of company that is… but as you’ll soon learn, Cox Target Media is the company behind that blue Valpak envelope you get each week in the mail. Vivio was named president of Cox Target Media in December 2010. Within a year, he has taken Valpak and Valpak.com to new heights, with a newly re-launched website, which has seen online traffic increase 400%, and new partnerships that have doubled the amount of online coupons to 40,000.

Whether you’re looking to save more than a few dollars each week, curious as to how Valpak is positioning itself for the future or wondering why Groupon is on the ropes, those answers are all found in this week’s PowerTalk. Click here to listen.

As with all of my PowerTalk conversations, there’s a number of investing tidbits that I discover along the way. Be sure to see how subscribers to my investing newsletter PowerTrend Profits are benefitting and making solid profits along the way. Click here.

Upcoming Appearances

• Be sure to tune into The Andrea Tantaros Show to hear me discuss the latest stock market and economic news with Andrea Tantaros.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.