Economic Data and Technicals Point Toward Possible Retreat in Equities

The market over the past few months has resisted the temptation for a pull back.  Hedge fund managers and long / short funds have held the market up with panic buys over concerns of under performance.  In light of the recent economic data in initial claims and retail sales combined with several technical indicators, it appears stocks are poised for at least a short term reversal.

Headline Retail Sales which includes automobiles was expected to be reported rather high with “Cash for Clunkers” providing a boost.  Unfortunately, automobile sales was the only component that rose sharply.  Most other components including furnishings, electronics, building materials, gasoline stations, sporting goods and general merchandise showed a sharp decline in month over month sales.  Analyst were expecting a decent boost in the month of July for retailers during the summer months and with possible signs of the economy stabilizing.  This however was not the case.

Initial claims which is a measure of the number of recently unemployed workers filing for state unemployment benefits rose unexpectedly to 558,000.  Analysts however were expecting 545,000 and even though this does not seem like a significant difference, it is important to note that employers are still continuing to lay off workers at a much higher rate than expected.tech2

Technical analysis is giving us several indications that this rally may be nearing its end.  Stochastics and the Relative Strength Index are beginning to show signs of weakness along with several points of resistance on the S&P 500 at around 1007 – 1015 (See Chart Below).  We are also seeing a major point of resistance in the form of the 38.2% Fibonacci Retracement at around 1016 cementing the other points of resistance previously noted (See Chart Above).