STRATEGIES

After several weeks of declining stock prices, major averages are now close to major support. This relentless selling should be followed by some significant buying, but MoneyShow's Tom Aspray recommends that you stick with high-quality stocks that are performing better than the overall market.

It has been a punishing last six weeks or so in the stock market. The selling was pretty relentless all week, and early rally attempts fizzled quickly. I have been noting the deterioration in the technical picture since late March, when I warned: "The risk of a deeper correction remains high.”

Stocks continued to act pretty well during the month of April, but as the month came to a close, the enthusiasm over the earnings of Apple (AAPL) made me even more nervous about the market’s prospects. Adding to my concern were the upcoming elections in Europe, which had me wondering “Will Europe Spoil Apple’s Party?"

Now that the markets have answered the question, what can we expect in the coming months and what should investors be doing?

Though I will go into this in more detail later, one thing is for sure: I would not be buying Facebook (FB). Even though I have an (unused) Facebook page, I am not convinced it is worth $100 billion.

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Despite the carnage in the stock market, Facebook’s IPO, and gold’s late rebound, the most striking development was in the bond market. The chart of the ten-year Treasury Note yield shows that they have dropped well below last September’s lows. They are well below the low seen in late 2008.

There are two main ways to interpret this action:

  • The first is that this is a final washout in yields that will be followed by some stabilization and eventually a rise in rates.
  • The other, more worrisome interpretation is that the completion of the trading range (lines b and c) is projecting an move to much lower rate, which will imply a much weaker stock market and economy. At this point, I feel this is unlikely.

US economic news last week was mixed. On the positive side, the outlook for housing continued to improve, with housing starts up 30% over the past year. Business inventory and industrial production figures also suggested that the economy was still growing.

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Retail sales dropped sharply from March, but were still positive, while there was mixed news on the manufacturing sector. The Empire State Manufacturing Report on Tuesday reflected a healthy increase last month. On Thursday, as the chart shows, the Philadelphia Fed Survey was negative, which damped the enthusiasm and increased the selling pressure.

This week, we get more news on housing, with existing home sales on Tuesday and new home sales this Wednesday. Also out Thursday are the latest numbers on durable-goods orders, as well as the weekly jobless claims.

On a global basis, there were some economic bright spots with surprisingly good GDP numbers. The Japanese economy grew at a 4.1% rate in the first quarter, Mexico was up 4.6%, and Singapore had an impressive growth rate of 10%, on the back of strong exports.

This week, the primary focus will again be on the Eurozone, as I do not expect anything dramatic from the G8 leaders after their weekend meeting. While most are wondering whether Greece will leave the euro, fresh concerns over Spain and Ireland surfaced late last week.

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Tickers Mentioned: SPY, QQQ, IWM, DIA, TLT