The Markets This Week

May 30th, 2012 Summer’s coming, and last week’s rising market was a welcome respite after three weeks of declining stock prices. But investors probably shouldn’t get too comfortable.
Though Wednesday’s reversal was technically impressive—the Dow was down almost 200 points early in the day before recovering to finish higher—serious damage has been done to market psychology since the first quarter ended. 
Investors are on edge, worried day to day about world issues like European sovereign debt and Chinese growth, says Doreen Mogavero, CEO of Mogavero & Co. Traders are closing each day with neutral positions, she adds.
That’s not the sign of a market about to move sustainably higher. Moreover, when U.S. stocks rallied in the afternoons last week, the buying influx wasn’t particularly strong, and didn’t inspire confidence, Mogavero notes. Market participants are very divided, she adds. 
Not only was trading volume low—we’re used to that—but the rebounds often came mainly in the afternoon when European markets were closed and conveniently in the absence of bad news from the troubled continent.
“Markets are being held hostage to a deteriorating situation in Europe…waiting for any sign of a policy move that will support equities,” observes Quincy Krosby, Prudential Financial’s chief market strategist. Stocks will struggle until the policy moves come, she adds.
As has been happening in most rallies this year, small stocks outpaced the big. The Dow rose 0.7%, or 86 points, to 13,454.83 last week, but it’s been down on 15 of the past 18 trading days. And the Nasdaq Composite gained 59 points, or 2.1%, to 2837.53. The Russell 2000 small-cap index added 19, or 2.6%, to 766.41.
Even if the European Union again rescues Greece, it’s hard to imagine a magic bullet in any scenario. Back home, financials remain the sector that worries investors. The first quarter saw a tremendous rally when the group rose. That upward impetus has disappeared, a savvy trader notes (Source:  Barrons Online).

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