Current Stock Outlook: Why it’s Uncertain

June 1, 2011 - PRLog -- April was a record for stocks. Unfortunately, the same cannot be said for May, which has been characterized by uncertainty and a lean towards the downside.
Since May 2, stocks have closed lower in 11 of the 20 sessions to May 27. And to make matters worse, the buying was normally accompanied by light volume. There remains a red flag, as the associated trading volume continues to be light on up days, which fails to help confirm a strong buy signal. Unless we see increased volume on the up days, we question the lack of mass market participation in the current rally.
My current investment advice is to be careful.
The period from November to April has historically represented the best six months of the year for stocks, according to the Stock Trader’s Almanac.
Stocks are now at a crux at the respective 50-day moving averages (MAs). The DOW and S&P 500 closed lower for the fourth straight week to May 27, and are looking to halt the slide.
The market is drifting slightly lower. About 71.13% of all U.S. stocks are above the 200-day MA, down from 82.03% a month ago. For the shorter-term MAs, the monthly decline has been more significant. Only 47.86% of U.S. stocks are above their 20-day MA, down from 68.12% a month ago.
On the plus side, the key indices have rebounded after recent breaks below their respective 50-day MA, which continues to be a battle zone for stocks. We are seeing some buying support, but the lack of momentum is a real concern in my view.
The breach was bearish and may signal additional weakness if buying support fails to emerge. The S&P 500 is below a key technical support level at 1,340. I’m seeing some exhaustion on the charts and potentially more downside weakness. There is a bearish downward trending flag formation that could signal additional weakness.
Could we be seeing a pending market decline?
What we will likely see is sideways trading as we head into and through the quieter summer months.
At this juncture, the near-term upside potential appears to be limited unless we see new reasons to entice traders to buy. There appears to be buying on dips and this is positive, but the negative will continue to be the light volume on the up days.
To continue on something that I have emphasized, the key is to monitor your positions and take some profits on the big winners. The last thing that you want is to see the big gains disappear. Always take some profits along the way—especially in a rising market.
Option traders could use call options to play potential gains, while taking some profits on current stock positions. In this way, you can manage the risk.
I believe in adopting strong risk management to protect your investments and hard-earned capital. Take some profits and use put options to hedge against a downside move.
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