Events Say We are Bearish not so much Bullish

We’re a Little Bullish but More Bearish with Events

China’s announcement on Saturday that it will end the yuan’s 23-month peg against the dollar, clearing the way for appreciation of the Chinese currency to resume, is likely to reinforce the recovery of an appetite for risk. But it didn’t lead to long term enthusiasm. By the end of the day the enthusiasm dried up.

But we do have a back drop of events that appear to make a good stand for a bullish run here, at least in the short term–

• Tensions in global financial markets stemming from the euro zone’s sovereign debt crisis appear to be easing, setting the stage for investors to dip back into risky assets in the second half of this year.
• Against this backdrop, world stocks, measured by the MSCI index , scored their biggest weekly gain since early March last week and hit a one-month high on Friday. European shares have rallied for eight days in a row, while Asian stocks posted their best week in six months.
• Fund tracker EPFR reported that over $37 billion flowed out of money market funds in the latest 
  week, while global equity funds saw the biggest inflow since early April.

But then there are also cries of hesitancy from the technical camps. It appears a technical indicator known as a Head and Shoulders pattern may be forming on the charts for the major indices. If resistance comes into play and the markets fail at the overhead resistance levels outlined above, and the 1040 level for the S&P doesn’t hold, expect a quick decline down to the 875 – 950 level. Since so many chartists are aware of this potential pattern, its likely outcome is probably unlikely, but time will tell.

On top of that, most companies won’t announce second-quarter earnings for a few weeks yet. But already Wall Street is buzzing about what might lie ahead. One worry: With investors on edge from bad economic news, the market is riding more than ever on these upcoming reports.

The Commerce Department reported Wednesday that construction of homes and apartments slumped 10 percent in May from the month earlier. Adding to the gloom, mortgage applications for new homes have fallen 40 percent in the past five weeks, a 13-week low.

The calendar does not favor the bulls either. Next week is the week following the quarterly quadruple-witching options expiration week, and most often it tends to be negative. However, it has an even stronger negative bias for the month of June. Using the Dow Jones Industrial Average as the benchmark, the week after June’s expirations has been down for 11 straight years, and 18 of the last 20 years. We shall see if that streak continues.

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