After a sharp upside day on Thursday that saw the S&P 500 Index bounce of its 50-day moving average, the market on Friday pulled back and retraced more than half of Thursday's gains. While the volume and rise on Thursday was sufficient for a follow through day on the S&P 500, follow-throughs that occur in June have a poor track record with the overwhelming majority failing. According to IBD, there have been seven follow-through days during the month of June since the year 2000. Not one led to a sustained market rally. The Market Direction Model's (MDM) buy signals during the month of June confirm this as they have not fared much better, despite the fact that the MDM has well outperformed IBD's basic market direction calls (e.g, "market in confirmed uptrend" and "market in correction") since the newspaper began making such calls in December 1994.
Recent market weakness has largely been a function of Federal Reserve board members hinting that a recovering U.S. labor market and economy would necessitate a reduction of the Fed's bond buying program, essentially a tapering of quantitative easing. The Bank of Japan added further selling pressure when they recently implied that their "Kamikze" QE program will not extend as far as investors had hoped. This sent the CBOE Volatility Index (VIX) to its second-highest level of the year, indicative of the resulting market volatility. That said, the question is whether the economy is really recovering. The slowdown in China is apparent as well as the everlasting recession in the UK and in Europe. The World Bank has also cut its forecast for global growth. The Fed may find that withdrawing from its current QE program is easier said than done.
Futures are up nearly 1%. The models are looking for sufficient evidence that the sideways action of the last few weeks is over. This may require the major averages to either break above or below major points of support or resistance, respectively. Action within leading stocks will also be a key variable.