On Monday, the World Bank predicted that the global economy will shrink by 2.9%, a deeper fall than the 1.7% contraction it predicted in March. This struck fear and it sparked a massive sell-off as investors and traders scrambled to sell off their shares. Monday also marked the biggest sell-off since the March rally started.

On Tuesday, Existing Home Sales came in worst than expected. This news dragged the market further down after the Monday sell-off. The sell-off stopped once the market hit a major support level. Then bargain hunters saw opportunity to scoop up the market which in turn led the market into a bounce off the lows to eventually close slightly to the upside.

On Wednesday, the news was rather mixed. The Core Durable and Durable Goods Orders came in better than expected but New Home Sales came in worst than expected. The market ignored the bad data and embraced the good data to send the market higher at the opening bell. The good opening did not last long as the market sold-off after the Fed released their monetary policy statement. The statement practically said the same things from the last minutes without further elaboration on the health of economy. The market managed to close slightly to the upside in spite of the lack of good news from the Fed.

On Thursday, the Final GDP for this quarter came in in-line with expectations. The Unemployment Claims was worst than expected. The market burst into life with a buying frenzy that kicked in even when data sucked. There was no significant explanation for the rise in the market except for the market being oversold in the short term and hedge fund managers killing the shorts. It was just another crazy day.

On Friday, the market closed flat as buyers and sellers were not keen to hold any position through the weekend.

The market’s breath was bad throughout the whole week even though the market had a huge gained on Thursday. The VIX Index was slightly down as compared to last week.

Major Events

• Fed rate remained at 0 < 0.25%
• 4 Banks failed and were seized by the FDIC on Friday bringing the tally to 44 failures in total for 2009.
• OECD upgraded its global outlook for 2010; IMF may upgrade the outlook too.
• Markets will be closed on Friday, July 3rd to mark Independence Day.

Economic Data

This coming week, the market will have a slew of important economic data starting on Tuesday. Tuesday will kick off the onslaught with the housing index data followed by Chicago PMI and Consumer Confidence. On Wednesday, the market will look into ADP Non-Farm Employment Change, ISM Manufacturing PMI, Pending Home Sales, Construction Spending, Total Vehicle Sales and weekly crude oil inventories. On Thursday, the market will close off with massive employment data followed by the factory orders and Natural Gas Investories.

Summary

This coming week will probably be another volatile week as the market digests the employment data. Speculators will be in the picture as they continue to thrive in the wild swings of the market. Fund managers will also feature as they “portfolio pump” and “window dress” by selling underperforming stocks and buying outperforming stocks.

The market will be watching the bond yield closely in the coming months. The 10-year yield was down last week as the Fed was buying up the bond. The Fed is likely to continue this policy until the market shows signs of strength.

The crude oil price continues to fluctuate violent amid the ongoing news in Nigeria, Iran and others. Last week the crude oil price settled at 68 dollars by the Friday close.

In conclusion, I am expecting the coming week to close lower if the market cannot breach its immediate resistance levels. The market will probably swing wildly in this shortened week as the current market sentiment favors the bullish side.

Sector Rotation

Financials led the gainers last week followed by Materials (4.32%), Health Care (2.97%), Technology (2.77%), Energy (2.44%), Industrials (2.38%), Consumer Discretionary (2.32%), Utilities (1.28%) and Consumer Staple (1.01%).

Health Care has been slowly gaining momentum amid the reforms. This reform will bring opportunities in the future for this sector. The good news is that the health care sector will not get the full blast from a bear market sell off.

This coming month, July will feature a volatile sector with good potential upside. This commodity in this sector is so significant that countries go to war for it just as civilizations past used to go to war for gold. So precious is it that U.S. decoupled its dollar from gold for it. The price of Oil is watched very closely as its movement will move markets. Its price is indicative of the rate of inflation. The recent tension in Iran and the attacking of oil pipes in Nigeria have a major influence on the oil prices.

The Organization of Arab Petroleum Exporting Countries (OPEC) is a cartel of twelve countries, which accounts for two-thirds of the world’s oil reserve, 33% of the world’s oil production, affording them considerable control over the global market.

In summary, the oil and energy sectors are expected to benefit in the future as oil is a depleting resource that is widely used and consume by the world.

Technical Analysis

The S&P500 Index closed at 918 last week. This indicates a fall of 3 points (0.3%) from the previous week’s close.

It was yet another week that belonged to traders and speculators. They once again dominated the market action as it was trading according to a technical point of view. This scenario will continue to play till the next round of corporate earnings releases.

The market had a flat to negative week. The market broke below the 900 level on Monday and threatened to break below the 890 level which has held firmly since May 09. The 890 level proved to be too strong a level to break which led to a bounce as bargain hunters picked up the pieces. The uptrend continued on Wednesday into Thursday as more people scooped up beaten down stocks as they were afraid to miss out on this rally again. On Friday, the market decided to deploy the wait and see tactic.

Looking at weekly candles, the S&P500 Index is suggesting a pause to the upside for the coming week. The weekly candle chart shows a Hammer pattern on a correction trend. This translates into a higher possibility that the market will go sideways with a chance of shooting to the upside.

Looking at daily candles, the S&P500 Index looks like it will have a pause or a down Monday. The daily candle shows a Doji, which signals the end of Friday’s run.

The immediate support levels are S1: 900, S2: 880 and S3: 850.
The immediate resistance levels are R1: 925, R2: 950 and R3: 1000.

The Dollar Index (DXY) had hung on to the 80 levels in spite of all the gloomy news regarding the depreciating dollar. The fall of oil prices is likely to lead to the strength of the dollar.

In summary, the market this coming week should be going sideway to the upside. However if the employment data sucks big time, then the market might just sell-off big time too. The key levels to watch are 890 for the downside and 930 for the upside. Oil price will also be a crucial factor that will influence the market. Once again stay alert for the short week and watch for a possible rally on Thursday as America goes into a three-day weekend before its biggest holiday, Independence Day.

[by Conrad Lim]