Stock supply -- an issue in Facebook IPO -- is larger market problem

Weekly Review: Major indexes posted marginal gains in pre-holiday trading

Stock index, chart, technical analysis Stock index, chart, technical analysis

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1317.82

+22.60

+1.74%

Dow Jones Industrials

12454.83

+85.44

+.69%

NASDAQ Composite

2837.53

+58.74

+2.11%

Value Line Arithmetic Index

2815.73

+67.84

+2.43%

Minor Cycle (Short-term trend lasting days to a few weeks) Negative / Neutral

Intermediate Cycle (Medium trend lasting weeks to several months) Negative

Major Cycle (Long-term trend lasting several months to years) Positive / Neutral

In the wake of the poorly executed Facebook (FB) IPO on May 18, the blame game has proliferated. Coming to market at $38 a share, one day before the opening it seems company officials at Facebook decided to offer 25% more stock than initially planned. That decision was probably the undoing of the IPO since the extra supply of stock in FB in a market that has been plagued by below average volume and so-so demand for months, didn’t play out well. FB has declined nearly 18% from the offering price and closed last Friday at $31.34.

Naturally those prescient watchdogs at the SEC “in an effort to ensure confidence in public markets” appeared in a timely manner after FB hit the fan. They will have more to say on this matter to the same extent they resolved the Madoff scandal and other market misfortunes in retrospect. We can also expect “shocked” commentaries from politicians like Senator “Foghorn” Claghorn regarding “special interests” on Wall Street, the mechanics of the stock market, and how more regulation will be necessary to avoid future FBs. Stay tuned….

But in the real world the market did what it does best when the price of FB was adjusted to the laws of supply and demand. For those who lost money that truism may be of little solace but, the market proved once again that it takes more buyers than sellers to make prices rise. Lately there has been more supply than demand and its likely FB was at the wrong place at the wrong time. A sale staged back in October when there were more buyers than sellers would probably have fared better.

Market Overview – What We Know:

  • Major indexes posted marginal gains in pre-holiday trading last week.
  • NYSE trading volume in front of three day holiday sank more than 16% on week.
  • Minor Cycle remains negative, but deeply “Oversold” in zone of possible short-term opportunity. Intermediate Cycle remains negative while ranging from “Neutral” to moderately “Oversold. Major Cycle remains fractionally positive.
  • Average Price per share finished week at $55.84, up 74 cents Monday through Friday.
  • Upper edge of 10-Day Price Channel in S&P 500 (1335.70) must be breached to suggest an end to short-term negative and reversal to Minor Cycle positive. Upper edge of Intermediate Price Channel (1403.55—S&P 500) must be penetrated to indicate an end to Intermediate Cycle negative.
  • Weekly MAAD posted marginal strength (12 issues higher and 8 lower) last week, but remains in Intermediate Cycle downtrend. Weekly MAAD Ratio was last at .56 in “Oversold” territory. Price-based intermediate oscillators are not yet “Oversold,” however.
  • Weekly CPFL was positive last week by 1.23 to 1, but indicator remains in downtrend on both short and intermediate term trend.
  • Cumulative Volume (CV) in both S&P 500 cash index and S&P 500 Emini futures remains above the May 18 lows, but CV in both issues remains noticeably weaker on longer term (see accompanying charts).

On the supply/demand front last week, stock market prices perked marginally higher as we suspected they might, given the “double” dip in “Oversold” readings on the near-term, proximity to 200-Day Line support, and the fact the market was simply ripe for a bounce. But it’s the larger Intermediate Cycle that remains an issue. While the Minor Cycle was last in “Oversold” territory, near-term “Oversold” numbers will be eliminated and will likely be replaced by relatively anemic price data in the sessions just ahead. Such inputs should result in “Neutral” readings on the Minor Cycle and a setup for further selling on the larger intermediate trend. It is the tone of that Intermediate Cycle that will remain the issue for the next several weeks.

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