Equities - 12 Steps To Recovery?

Since reaching the lows on 3/6/09 to the high on 5/7/09, the equity markets have rallied (basis DJ June futures contract) almost 34%. Not too shabby for a two month rally. On a technical basis, we are beginning to see some indicators showing overbought in conjunction with several of our pricing ranges converging between 8300 and 8700.

Fundamentally, the economic news since March has continued to show either less negative rates of change or some positive improvements. The April Unemployment report, released on 5/8/09, demonstrated a mixed picture of the economic situation. The Bureau of Labor Statistics reported unemployement increasing to 8.9% from 8.5% and a less than expected number of job losses for April. But the underemployment rate increased from 15.6% to 15.8%. (We will be discussing the underemployment rate in a future commentary). The March figures of job losses were revised upward to 699,000.

The economic reports do not imply  the economy is necessarily recovering, but it may imply we are at least beginning to bottom. Stabilizing may be considered one of the "12 steps" of recovery. Last fall may be considered a step towards recovery when the Fed and the Treasury were no longer in denial of the decaying credit market situation. To a certain degree one could compare the recovery of our economy to the recovery of an addict, as the economy was addicted to leverage, debt and speculation.

If the DJ contract continues its rally, the next level of resistance is 8570 ( the recent high of 5/7/09) to 8670. Beyond that we are looking at 8900 to 9100 as major resistance level. We do have pricing in the 9600 to10300 area. However, we believe some consolidation will need to occur before the market will reach those prices and there will need to be more confirmation of the economy recovering. If the market begins its consolidation, initial support is found in the 8470 to 8380 range. If this level is broken, the next major support is 8270 to 8100. Very strong major support can be found in the 7800 to 7500. A major consolidation should find a bottom in this level. It was only a few short weeks ago that we were in the 7500 to 7800 range.

The S&P 500 (basis June contract) also made its recent high on 5/7/09. If the market continues the rally, 945 to 986 would be the next resistance level.There is support in the 919 to 912 level. If this is broken our next level of support is 891 to 871. If a major consolidation occurs, the 800 to 825 level should be the bottoming range.

Keep in mind, on Thursday the equity markets sold off prior to the announcement of the stress test results, although a lot of the information was already leaked out prior, so it wasn't that much of a surprise when the news was released and the market rallied a bit on the news. And it slowly moved higher overnight and into the morning hours just before the jobs report was released. Once the jobs information was released, the market was in a trading range until the last hour of trading. Could the consolidation have already started on 5/7/09?