Gunfight at Wall Street's O.K. Corral

Like the famous Gunfight at the O.K. Corral on October 26, 1881, between Wyatt Earp, Doc Holliday and cowboy robbers, today the bulls and the bears are involved in a deadly shootout for control of the future direction of global stock markets.

At Wall Street Sector Selector, we had a good week with several positions gaining +4 to +10%, and we are a hair's breadth from going to "Red Flag Flying" mode in which we would have confirmation of lower prices ahead. New weakness has entered several sectors, including Oil Service, Transportation, Building, Aero Space, Autos and Medicals.

Strong sectors remain Commodities, Precious Metals, Oil, Media, Banks and Finance.

Our strategy will be to stick with current positions and carefully watch how today's current tight range plays out.

Our inverse positions are in anticipation of lower prices ahead and if this doesn't materialize, we will make a quick exit. Our precious metals positions keep us well positioned for more inflation expected down the road and should also perform well if the rotation out of equities continues.

We will continue to enter new positions that demonstrate a high probability of success.

We continue to operate in very dangerous and uncertain times.

The View from 35,000 Feet

In the chart above, we can see how price is sitting right at support of 887 on the S&P 500. A break below here would likely take us quickly down to the 840 level, a drop of about 5%. Overhead resistance remains at 923 with a triple top formation that would require significant energy to break.

From a fundamental perspective, storm clouds seem to be gathering, as well.

Last week, S&P downgraded Great Britain's credit rating from stable to negative, a first, and the immediate question was "could the same thing happen to the U.S.?"

That question was quickly answered by PIMCO chief, Bill Gross who said in an interview on Bloomberg Television that the U.S. will "eventually" lose its AAA rating.

And Treasury Secretary Geithner moved to calm markets by saying the target for the federal deficit is 3% of Gross National Product compared to the current 12.9% which is at a historical high of $6.4 Trillion.

The bond market reacted to all the sour news with the 10 year note posting its biggest weekly loss since June, 2008.

And Bloomberg reported that David Rosenberg, former Chief Economist for Merrill Lynch, said that the S&P 500 may fall beneath the 12 year low reached on March 9th because consumer spending hasn't recovered. He called the rally since mid-March a "gargantuan short covering rally" and said he doesn't expect the economy to recover in the second half, concluding by saying, "I'm seeing no revival of consumer spending in the second quarter."

And to top it all off, minutes from the April Fed FOMC meeting pointed to a delayed recovery and the possibility that five to six years could be needed to return to normal economic growth.

Finally, the two Chart of the Day exhibits below give a clear graphic of where we currently stand.

Source: Chart of the Day

Above, we see that S&P earnings are down over 90%, the largest decline on record. And below we see that the PE Ratio on the S&P is at record highs. Put the two together, and it's difficult to make a bullish case for the next few months going forward.

Source: Chart of the Day

The Week Ahead:

Several important economic reports this week that could be market movers:

Tuesday: March Case Shiller Home Prices; May Consumer Confidence

Wednesday: April Existing Home Sales

Thursday: Weekly Jobless Claims; Aprl Durable Goods, April New Home Sales

Friday: 1Q GDP Revision; May Chicago Purchasing Managers Index, May Consumer Sentiment

Sector Spotlight:

Weekly Leaders: Oil, Brazil Index, Gold Miners, India

Weekly Laggards: Long Bonds, U.S. Dollar, Regional Banks

Disclosure: Long GLD, UGL, SLV, AGQ, SH, QID.

Comments

[logicalthought:]

>>We will continue to enter new positions that demonstrate a high probability of success.<<

Good. This is something I always like to see in my money managers.

May 25 09:08 AM

[ManAboutDallas:]

>>We will continue to enter new positions that demonstrate a high probability of success.<<


"We will continue to keep a sharp watch out for icebergs"
-Captain of the Titanic-

May 25 01:49 PM

[one eye:]

The Insider Buy/Sell index is back in Bullish territory and the Investor Sentiment Index has just entered neutral. Yes Indeed, this rampant bullishness will be quashed.

May 25 09:04 PM

[cameroni:]

If those two charts are not shouting "take cover" then nothing will move some bulls to react. The trajectory is clear. I do not expect next quarters earnings to be stellar by any means with consumption and consumer confidence levels still so abysmal. All publicly traded companies will be taking actions to prove their worth though. It should be interesting to see the steps they take to achieve positive results. Layoffs and asset sales instantly come to mind though.

May 25 10:25 PM

[Old Trader:]

True enough, but "window dressing" isn't sustainable.


On May 25 04:14 AM Freya wrote:

> Money Market Funds are still about where they were a couple of months
> ago.
>
> Whether its a Mutual Fund or a Hedge Fund, they have a lot of Cash
> waiting to be used. The longer the SPX stays firm, the greater the
> likelyhood that there will be an explosive upside move before the
> end of June.
>
> The end of the quarter is coming. It won't look good if you have
> a bunch of undeployed Cash and the Markets are Up.

May 26 01:14 AM