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Momentrix View of the Markets-Week In Review June 17, 2011

|Includes:SDS, TWM, ProShares VIX Mid-Term Futures ETF (VIXM), VXX

The S&P 500 broke the string of 6 consecutive down weeks although only by a hair. This is a slight victory for the bulls considering how ugly the market was on Wednesday. The NASDAQ was not so lucky and continued its severe underperformance, led by technology. It is not unusual for technology stocks to have trouble in the summer especially when the market is so unstable. Since technology led most of the rally since the March 2009 bottom, it is not unreasonable for a correction to be steeper for NASDAQ stocks.
                The S&P 500 finished the week above its 200 day moving average. Many technicians are looking at this zone of support as a line in the sand. It is not surprising to see an attempted bid here based on the oversold nature of the market correlating with this support. Judging by the fact the NASDAQ has now closed below its 200 day moving average, we don’t see much significance in the S&P’s holding the 200 day unless the NASDAQ can close above it with a strong bid. The internals of the market remain poor along with new lows now surpassing new highs on the NASDAQ. The number of new lows on the NASDAQ is the highest since August of 2010.
                The one positive that is developing is that negative sentiment has increased over the last month. The ratio of bulls to bears according to AAII (American Association of Individual Investor’s) has dropped under 1, meaning there is more bearishness than bullishness. Also, the VIX has broken out above its 200 day moving average along with a sharp move up in the overall put to call ratio. Of course there are many other forms of sentiment to add to the picture, these are just some examples to follow. Sentiment is not a reason to be bullish by itself (we do take a contrarian position on sentiment; buy when the crowd is fearful), but it can be a clue to a potential turn. We will need to see some more evidence from the market that a bottom was put in to believe the sentiment is extreme enough. Do to the slow erosion of this sell-off, there is potential for a sharp drop in price that is perceived as a panic that might put in a short-term bottom.
                The coming week will be highlighted by the Federal Reserve decision on Wednesday. The market will be looking for clues from the Fed on its continuation or halting of QE2. The most likely scenario for any continuation would be a QE2.5, where the Fed continues to invest the proceeds it receives from all the Treasury Bills it owns. The recent economic data and market action does make this possible but the political will to continue this policy given its poor results so far probably has diminished. The risk reward the Fed analyzed last fall is much different now, the policy creating the potential for a sharp spike in commodities without helping economic growth. That said, the market may perceive the QE2.5 as a positive or “risk on” scenario causing a sharp rally. The week will end with durable goods and the final GDP revision, both having some potential to move the market.
                The bottom line is that the market is in a downtrend and we see defense (SDS, TWM) as the best position right now. A further sell off is tough though and it seems late to add extra hedges. Markets tend to move much further than most participants see possible and that is what can cause extensive losses in the market. It is this reason we will remain defensive going into the week. We do see the potential for a sharp move up in price given the technical position of the market. The “whippiness” in price late in the week, especially in the Dow, is a clue to this potential. Any rally will likely fail in time. Look for failed rallies to reaffirm the poor market action in the weeks ahead.