MLR - PMP 5/8/14

Published : May 8 2014 at 8:30 ET

Major averages traded mixed on higher volume. The divergence was pronounced with the NASDAQ Composite down -0.32% while the S&P 500 was up 0.56%. This divergence between NASDAQ Composite and S&P 500 is somewhat akin to the divergence seen in late 2007 when the Russell 2000 and S&P 500 started to severely laggged the NASDAQ Composite which was the beginning of the market slide in 2008, culminating in a great crash. This year, the Dow and S&P 500 lead while the NASDAQ Composite and Russell 2000 lag.

Divergences of such a major magnitude are generally bearish as they lead to further market weakness. The quantitative easing effect has prevented major averages from correcting sharply since January 2013. Indeed, corrections in the S&P 500 since then have been contained to 6.1%. So even with said divergences and major damage done to leading groups, can QE still save the day and spur markets higher once again? Conditions would say otherwise, especially given additional pronounced damage done to leaders today and in recent days. Further, defensive stocks continue to lead the way and the % of bullish newsletters remains stubbornly high, perhaps due to the S&P 500 being less than 1% off its all time highs.

In economic news, first-quarter nonfarm productivity sank 1.7% while unit labor costs grew 4.2%, both which didn't come close to the more favorable expectations. Unsurprisingly, testimony from Federal Reserve chief Janet Yellen hinted that interest rates would be kept at record low levels for an extended period of time. In other words, QE remains alive and well. But mounting evidence suggests that the economy is not turning around in the US or abroad, despite aggressive money printing by central banks around the world.

Las Vegas Sands (LVS), which we discussed as a short in our Pre-Market Pulse report of this past Monday, is gapping down this morning to its 200-day moving average and is undercutting the 73.01 low from last week. This and the 71.09 mid-April low lie near the 200-day moving average, so we would look at this area as our initial downside price target, although the stock could continue lower. If the stock drops below the 200-day line, then one could use that as a useful upside trailing stop.

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