TUESDAY'S ISM MARKET SHORT SQUEEZE
After the recent releases of many of the regional ISM numbers (most of which looked surprisingly weaker than expected, save for the Richmond Report), the national ISM number was released last Tuesday at 10AM and was surprisingly good, considering the weaknesses in the bulk of the preceding regional reports.
This surprise in the strength of manufacturing at the national level produced a market short squeeze Tuesday, with many investors who where predominantly short covering their positions, and therefore, temporarily yet dramatically adding significant buying pressure to the markets.
Included in this short-squeeze buying were rises in stocks, the dollar, and commodities. The rotation in this new buying was reported as being generally more indicative of a positive reaction to an expectation of a strengthening economy than to further Fed QE actions.
This could have been good news, had these expectations been correct.
Positively trending employment data emerging and released in reports due out later in the week were hoped for as further signs of a strengthening economy and good news...especially among analysts and traders eagerly looking for a potential breakout from achieved composite index price resistance levels at this critical juncture in time.
On Tuesday some analysts and the media were even talking about a possibility that a reactive market meltup was in the beginning stage this week.
However, Wednesday's market action failed to follow through, and at one point during the day even erased all of the gains in the Dow 30 Industrials from Tuesday's national ISM announcement day.
THURSDAY'S WEAKER THAN EXPECTED RETAIL DATA
Thursday's market action was even weaker, with the S&P selling off significantly below Tuesday's closing level.
Weaker than expected retail data was released, showing US retail spending its lowest in 7 months, and not picking up any momentum. Broadly held concerns regarding further erosion in European markets and double-dip recession there also caught headlines. This put further fundamental pressure on market prices here.
FRIDAY'S WEAK EMPLOYMENT DATA
On Friday national employment data was released and also disappointed. Data indicated hiring slowed sharply last month, suggesting the economic recovery might be faltering. This further magnified and accelerated downside pressure on market prices here, with a dramatic 168 point selloff in the Dow 30 Industrials occurring by the close of Friday's trading day.
THE WEEK'S EARLY RALLY IS REVERSED
Whereas the SPX started the week at 1393 and climbed to 1417 during Tuesday's trading (re-approaching the 1422 near-term momentum highs achieved last of month), these gains were completely erased by Thursday's market close. And then, Friday's additional steep loss added the possibility to the market that a significant pivot in SPX prices, on a week-to-week charting basis, MAY now be in formation (if you will pardon the double entendre).
FOLLOWING WEEK'S PRUDENT INVESTMENT STRATEGY: A STRADDLING HEDGE
At such a critical and volatile juncture in the market a good approach to investments for those who have not yet applied any portfolio value hedging insurances may now be to employ a broad straddling position on the SPX.
This straddle position could serve to protect most of the market gains achieved since last year's mid-year market decline and low reached in October, while also positively positioning a portfolio for the possibility of market stimulating news (such as a Fed QE3 announcement), and the return of the market to an upward trend as some analysts are ardently forecasting.