Market spends another slow day, trying to consolidate for a move through resistance.

SUMMARY:
- Energy deal excites the market, but hard to tell given the price and volume moves.
- Early leaders starting to emerge even as market sputters along.
- Headline durable goods post surprising loss, but still shows plenty of underlying strength.
- Can a 50 BP hike spur a rally?
- Indices remain at the crossroads, trying to consolidate as leaders start to stir.

Market spends another slow day, trying to consolidate for a move through resistance.

With an extraordinary 2 for 1 mindset, Anadarko (APC) announced an acquisition of KMG and WGR in a bid to become the largest independent oil and gas company in the world. Of course, it was no 2-fer deal as APC is paying premiums of roughly 40% and 50% respectively. Either energy companies are grossly undervalued after a one month correction to a 3.5 year run or Anadarko has made the blunder of the decade.

While the energy sector got hot flashes over the magnitude of the deal, the market was rather under-whelmed. Stocks opened softer but managed a nice rebound, breaking sharply higher to start lunch. Both NASDAQ and SP500 moved to the 18 day EMA once more, but it a summertime Friday meant low volume once more. Without the trade behind it the move waffled and faded into the close. The large cap indices were a gnat's butt lower while the small and mid-cap indices with their large contingent of energy stocks managed some decent gains.

As noted, volume was lower than a very low volume Thursday, capping a weak of underachieving trade. The only bump higher was Wednesday on the yawn inspiring follow through session. Breadth was as flat as the indices. It was not a week of technical breakthroughs in the market, a sharp contrast to the wildly varying internals and price movements two weeks back.

That in itself says something. After a wild ride the prior week where stocks sold hard and then rebounded hard, the market went to simmer with low volume, narrow breadth, and a lateral move. You can look at this either way you want to. Taking the negative view first (after all the market is in a near term downtrend), it shows the inability to move through even near resistance though it showed a follow through session Wednesday. Summertime with low volume and typically a bias to the downside.

As for the positives, the market refused to sell off with any strength even after a bounce Wednesday to resistance. The sellers did not use that opportunity to swarm. Importantly, starting Wednesday and much more so Thursday and Friday, we saw the emergence of some leaders starting to advance. We found ourselves looking at more upside plays Thursday night as that is where the patterns were pointing, and then Friday we found ourselves moving into those stocks as they made solid advances from good bases. Leadership. It does a market good.

That still leaves the market trying to find its way higher after the follow through. Leadership is stirring but the market has yet to respond to good news with a really solid move. The Fed is on tap Wednesday and Thursday, and the market will be on eggshells ahead of that decision what with talk still of a 50 BP hike as a Fed response to the questions about Bernanke's inflation fighting fortitude. Nonetheless, we often see the market rise modestly into the uncertainty. A 25BP hike and some even keel language in the statement might give the market the impetus to continue its summertime base building with some leadership continuing to move out in front. Not a terribly exciting scenario, but not as bad as it looked two weeks back.

THE ECONOMY

Durable orders fall when expected to rise, but solid outside volatile transportation.

Transportation was down again, not the almost 40% decline as in April that dragged the index down 4.7%, but still a sharp 18% decline. Factor out the transportation and you get a very respectable 0.7% gain, better than expected ex-trans.

So, right off the bat the report was not as bad as the headlines. Then you factor in the other 'under the headlines' numbers and it gets better. Machinery orders rose 2.3%. Computers up 1.9%. Communications +5.9%. Non-defense capital spending rose 1% month over month but 10% year over year. Unfilled orders rose 0.6% on top of April's 1.5% gain. That is the highest level in the history of the report since its inception in 1992. Not exactly weakness that would induce the Fed to pause in June or even in August.

Week shows solid economic data, prompting bond yields to recover after prior Fed-scare.

Despite the market's inability to move on the week, there was a slew of positive economic data, both newer and older, that indicate the economy is not dead yet.

The few earnings announced were solid and projections were solid as well. FDX, ODFL, and Inco reported strong results and good times to come. BBY jumped its dividend 25% after its strong earnings, CC followed with its own strong results and projections. DRI (casual restaurants) sees strong profits for the year. Target reported June sales would run at the upper end of the range. Those are looking into the future and companies still see solid consumer and business spending even with gasoline hovering around $3/gallon.

The economic data was also better though still mixed in some circles. The regional manufacturing reports improved in the new orders category after a weaker May. Weekly same store sales are holding at 3% or better gains over last year, again even with gasoline at $3/gallon. Jobless claims fell back to near 300K after rising well above that level for about a month.

On the negative side, the LEI fell 0.6%. ECRI indicators slipped again for the week as well. Overall, however, ECRI is not showing a major decline, just a slowdown. The big caveat for ECRI is the Fed and what it does with rates. ECRI's FIG (future inflation gauge) continues to show inflation to have peaked in this cycle. Unfortunately the Fed relies on its own methodology versus using ECRI, and we are all very aware of the Fed's track record.

Bond yields rise ahead of FOMC meeting & lingering talk of 50 BP hike.

The stronger economic data in part has helped move bond yields back up. Lower yields as seen two weeks back, especially long yields lower than the Fed Funds rate at 5%, indicate anticipated lack of demand for money down the road and thus the lower rates. The return of rates to levels well above the Fed Funds rate indicates an improved outlook (5.26% 2 year versus 5.23% 10 year).

It also shows reality setting into the bond market. This close to the FOMC meeting and with the Fed's tough talk, the market is making the adjustment to the inevitability of another 25BP rate hike. That has less to do with economic strength as it does with hedging bets. It will be important to see what rates do after the FOMC meeting, i.e. whether they move right back down in anticipation of a slower economy. Higher interest rates in general are not typically good for the economy.

The yield curve remains slightly inverted at 5.26% to 5.23% as noted. The spread has narrowed as bond yields moved to 4 year highs. That suggests improving sentiment about the future but it is also very notable that even with the surge back up in rates the curve remains inverted. That is still pricing in concern about the future with the Fed overdoing it.

What concern? More talk of a 50BP rate hike given all of the signs of a continuing solid economy, even though there are enough counterbalancing indications that would warrant keeping it at 25BP if you are going to hike at all. The Fed has a history of getting right up to the end of its rate hiking campaign and then zinging the market with 50BP 'insurance' hikes right at the end. It apparently feels the 50BP gives its some cover in the event economic activity remains strong in the pause that often follows a 50 BP hike. We say pause because that is what the Fed launches the 50BP point hike for: it wants to stop and see what is going to happen.

What typically happens at this juncture in the hiking campaign is that the Fed is very close to pushing too hard, and that 50 BP hike usually does just that. Indeed, after the 50BP hike the Fed is cutting rates within 9 months. Just reporting history and watching how thus far it has been repeating itself as we anticipated back in 2005.

Nonetheless, we are almost pulling for a 50 BP hike. If it means the Fed is over and done as opposed to prolonging the water torture that the speculation puts us through, it would be worth the larger hike. We have often said we would prefer the Fed tell us where it thinks rates need to be and then move them there. A 50 BP hike would most likely mean the Fed is finished, and with the economy regrouping and recouping some of its expansion strength that could spark a rally as the market senses the Fed is through.


THE MARKET

MARKET SENTIMENT

Last week saw bullish and bearish advisors butt head to head with the lowest bullish reading since the October 2002 bottom. That follows the spike higher in the VIX to 23.81 the week before and the almost four weeks of the put/call ratio closing at 1.0 or better. Sentiment indicators have hit relatively extreme readings, particularly with respect to bulls/bears and the put/call ratio. Volatility spiked to levels not seen since March 2003 when the market was testing its strong move off of the October 2002 low.

That may or may not be enough to shove stocks higher after this two-leg decline. When volatility, the put/call ratio and the bulls/bears hit levels that sparked prior rallies in this overall uptrend failed to do so after that first leg lower, we surmised it would take more to get this market moving back up. It has experienced more selling and some impressive bearish sentiment. It still might take a spike in volatility into the forties to do the trick.

That is the story with sentiment; it gives you an indication that things are getting ripe to change direction, but it is not great at timing. Back in 2002 as the market was bottoming the indicators were getting very extreme but it took the market three months of volatility spikes to finally put in the bottom. Thus just because we see volatility spike and bulls and bears hit extremes, that does not mean happy times are here right away. The market also has to do its part with a bottom, a follow through, and rebuilding some bases to have the strength to sustain any moves higher. We like what we see in the sentiment, but the market has yet to show us it is ready to make the move. It is trying to drum up some leadership, but it we are still looking for it to clear resistance.

VIX: 15.89; +0.01
VXN: 20.36; -0.45
VXO: 14.94; -0.16

Put/Call Ratio (CBOE): 1; -0.04

Bulls versus Bears:

Last week they were converging and this week they actually met at 35.6% each. 35% bulls is bullish and the highest level since the October 2002 bottom. Bears are higher than they have been on any time in this rally. It is always bullish when bulls/bears converge, and super bullish of they cross over. If the market continues the rebound after the Wednesday follow through they will likely not make the cross, but even back in late 2002 they did not cross one another when the market bottomed after that long downtrend. This is more than good enough to rouse the upside as it means there is enough money on the sidelines to sustain a push higher as opposed to flaring out after a brief move.

Bulls: 35.6%, down sharply form 38.7% last week. A new low on this cycle, well off the 53.2% at the April peak. It surpassed the 42.3% hit on the last low. The current level puts it below the May and October 2005 readings that saw new upside runs.

Bears: 35.6%, up from 34.4% last week. Not as dramatic a move higher as last week (up from 31.5%), but easily posting a new post-2002 high as it eclipses the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).

NASDAQ

Stats: -1.52 points (-0.07%) to close at 2121.47
Volume: 1.62B (-5.3%). Volume closed out the week lower and well below average, par for the course on a week that saw summer fully impact the market. The follow through attempt Wednesday was on stronger volume but still far below average. Calmer trade as the index moves laterally is not necessarily a bad thing. Consolidations are typically quiet, but at this juncture NASDAQ has not moved out from the downtrend and is still below resistance. Somewhat constructive price/volume action for the week but more like avoiding distribution than any accumulation taking place.

Up Volume: 706M (+327M)
Down Volume: 882M (-412M)

A/D and Hi/Lo: Decliners led 1.06 to 1. As with everything else Friday, a dead heat.
Previous Session: Decliners led 1.45 to 1

New Highs: 47 (-4)
New Lows: 126 (+11)

The Chart: http://www.investmenthouse.com/cd/^ixic.html

NASDAQ sold off early, rallied back up to tap at the 18 day EMA (2141) on the high, but then slid back down midrange to close. That left NASDAQ with a tight doji on the session, meaning the buyers and sellers were at a stand off, just as with everything else Friday. Since rebounding two weeks back NASDAQ has moved laterally in a range above 2100 on the low and the 18 day EMA (2141) on the high. Volume was all over the map the first week and then calmed down as the price range did the same. Still at an important juncture, trying to set up for a break higher but as of yet unable to make the move.

SOX (-0.84%) was the relative strength laggard Friday, fading for the second session from resistance at the 18 day EMA (454) once more. This is the level that stalled it out in early June when it tried to rebound from the first leg of the selling. It is backsliding, ahead of the rest of the market as it did then. Critical for the rest of the market that SOX holds its lateral move of the last week as well. It closed at 445, right at the closing lows of this lateral move. One of the keys for the week and it ended the week on a weak note.

SP500/NYSE

Stats: -1.1 points (-0.09%) to close at 1244.5
NYSE Volume: 1.412B (-3.63%). Volume was lower as well as SP500 held steady and SP600 posted a modest gain. Another index that spent the week on lower volume after a wild volume week before. Trying to consolidate above the trendline and below the 18 day EMA, and this is the kind of volume you want to see. Nothing all that great, but better than distributing. Volume has to calm down and stop the distribution before it can improve. This is a start but until price moves that is all it is.

A/D and Hi/Lo: Decliners led 1 to 1. Dead heat as with price.
Previous Session: Decliners led 1.89 to 1

New Highs: 26 (-2)
New Lows: 185 (+13)

The Chart: http://investmenthouse.com/cd/^gspc.html

SP500 tapped the 18 day EMA (1253) on the high and the 2003/2004/2005 up trendline on the low (1242). It closed on the low side of the range but continues its lateral move of the past week confined between those two boundaries. Still weak in its downtrend but trying to consolidate laterally and put something together. It beats distributing and is trying to build, but it remains locked in the downtrend and has to show a break over that 18 day EMA this week to change its character.

SP600 (+0.37%) was a relative strength leader tapping toward the 18 day EMA (364.95) on the high before fading back for a much more modest gain. It really never got that close and is still well off the 200 day SMA (366.19) that stalled it just over a week back. Making some higher lows the past week, trying to build for a move higher. Fighting the tide and the time of year, but as with SP500 it is making an effort while still in its downtrend.

DJ30

After the Wednesday move took DJ30 up to the 50 day EMA (11,110) on the high, the blue chips faded back to the 10 day EMA to close Friday (10,986). Low volume fade after some better though still below average volume on the Wednesday bump higher. It too is still in its downtrend, coming up to test it on Wednesday. Trying to make a higher low as with SP600. How it moves off this level will tell more about how the market is going to move near term.

Stats: -30.02 points (-0.27%) to close at 10989.09
Volume: 222M shares Friday versus 250M shares Thursday. Another low volume test back to near support.

The chart: http://www.investmenthouse.com/cd/^dji.html

MONDAY and the week ahead.

A lot of economic data ahead this week highlighted by the two-day FOMC meeting Wednesday and Thursday. Friday won't be a slouch, however, as personal income and spending, Michigan sentiment, and the Chicago PMI are released.

Stocks closed out the week basically where they started, trying to put something together right at their downtrend resistance. A trend tends to stay in place unless it has run its course or something acts to change it. The market absorbed a lot of bad news about the Fed over the past few weeks, unable to hold up in face of it. It has also let off a lot of steam during that selling and has started to rebuild with bond yields recovering, a modest follow through Wednesday, and some leaders starting to break higher. That latest element is the most encouraging as this market has lacked leadership ever since April. Thursday and Friday leaders were starting to make moves even as the market sputtered. This week we need to see the indices follow their lead with some decent trade if this downtrend is going to break here. We have a lot of new upside plays on the report, indicative of this leadership return.

Though we do see some positives we have to put it in perspective. The indices are still in downtrends and the move up the past week was on no volume. Of course, there was only one session that moved up and it was a relatively weak follow through attempt. SOX turned lower more than the rest of the market Friday, and it led the other moves lower. SOX remains an important indicator in the coming week.

It is also a tough time of the year to move higher. It is not unprecedented, however, particularly with the sell off ahead of earnings. We already saw some impact of solid earnings and good guidance this past week with FDX, Inco, et al. Analysts are starting to move their earnings expectations back up after lowering them in anticipation of a slowdown. We would prefer to see them lower still heading into earnings to get a better jump, but the market has definitely let some air out. A good time to do so; beats entering earnings season with a strong rally.

The indices head into this week still at a crossroads, still in the downtrend but showing signs, albeit faint, of trying to break the trend. After the weak Wednesday follow through attempt, the market is still in need of a strong upside session to show the buyers are interested. That would, naturally, take the indices out of the downtrend. That leadership will help, but we also still see a lot of stocks that have bounced back to resistance from nasty selling and look to be stalling out. Again, this is the lick log time for the market in this move, but as noted above, if the Fed goes 50 BP what would appear to be a real downside catalyst for stocks may turn out to be the trigger of a rally after some initial 'surprise.'

Support and Resistance

NASDAQ: Closed at 2121.47
Resistance:
The 18 day EMA at 2141
2156 is the August 2004/April 2005 up trendline.
2162 to 2155 from December 2005 and September 2006
2185 to 2182 is the September 2005 peak and interim high from November 2005.
The 50 day EMA at 2200
2205 is the December 2005 closing low
2218 is the August 2005 peak before the sell off through October 2005.
The 200 day SMA at 2229
2234 is the early June high
2240 is closing low in February range.

Support:
2100 from the early and mid-2005 peaks
2063 is modest, soft support
2050 from the summer 2005 lateral range lows.
2045-47 from June and October 2005 lows and June 2004 highs

S&P 500: Closed at 1244.50
Resistance:
The 18 day EMA at 1253
The 200 day EMA at 1262
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 50 day EMA at 1270
The late January peak at 1285
The early June high at 1288
1297.57 is the recent February high.
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
1324 to 1329 from the October 2000 lows.

Support:
1245 from the August 2005 high & May intraday low; 1241 from the September 2005 high
1242 is an old trendline from the August 2003/August 2004/October 2005 lows.
1225 from the March 2005 high
1213 from December 2004 high to 1215
1205 from the August lows

Dow: Closed at 10,989.09
Resistance:
11,044 is the January high.
11,097 to 11,137 is the last peak from the February top.
The 50 day EMA at 11,110
11,159 is the February high.
11,279 is the late May high
The March 2006 highs at 11,329 to 11,335
11,350 from the May 2001 peak
11,401 from the September 2000 peak and April 2001 highs

Support:
The 10 day EMA at 10,986 held on the Thursday and Friday low
10,965 from Q4 2000
10,931 is the November 2005 high
The 200 day SMA at 10,898
10,890 is the December 2005 closing high.
10, 737 to 10,730 from December and February lows
10,705 - 10,965 from July/August 2005 range top to bottom
10,678 to 10,665

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

June 26
New home sales, May (10:00): 1.15M expected, 1.198M prior

June 27
Consumer confidence, June (10:00): 103.0 expected, 103.2 prior
Existing Home sales, May (10:00): 6.62M expected, 6.76M prior.

June 28
Crude oil inventories (10:30): 1.385M prior

June 29
GDP, final Q1 (8:30): 5.6% expected, 5.3% preliminary
Chain deflator, Q1 (8:30): 3.3% expected, 3.3% preliminary
Initial jobless claims (8:30): 308K prior
FOMC decision (2:15); Expecting a 25BP hike according to the Fed Funds Futures contract but there is talk of a 50 BP. If we see a 50 BP that will likely mark the end of the hikes.

June 30
Personal income, May (8:30): 0.2% expected, 0.5% prior
Personal spending, May (8:30): 0.4% expected, 0.6% prior
Michigan sentiment, final (9:45): 82.5 expected, 82.4 prior
Chicago PMI, June (10:00): 59.0 expected, 61.5 prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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