Thursday, June 22, 2006

Stocks take a breather, still have to face up to near resistance.

- Soft session after Wednesday follow through, but no hard selling as indices remain at the crossroads.
- Jobless claims hover near 300K, leading indicators post sharpest decline since post-Katrina drop.
- Sellers remain at bay as market consolidates at the crossroads just below near resistance.

Stocks take a breather, still have to face up to near resistance.

Stocks opened softer and were weak all session, not atypical after a solid surge as on Wednesday. The Wednesday move took the indices up to next resistance in this rebound from the second leg of selling. That resistance is where NASDAQ and SOX failed last time, and that makes this an important test of the rebound, i.e. where the indices will rally out of this downtrend or fade back and continue lower with the third leg.

Many believe the sentiment indicators are saying the market is bound to move higher from here. Bulls and bears at a dead heat, volatility hitting highs not seen since coming off the highs that marked the end of the long downtrend, the put/call ratio spiking over 1.0 on many occasions. Those certainly suggest a rebound as they have on three other occasions in the post 2002 rally, but this time everyone is counting those chickens before the downtrend is broken. As we said a few weeks back when the market surpassed the sentiment levels hit on the past rebounds, if they did not produce a rebound at those levels there was likely more selling to come. There has been more selling and the sentiment indicators moved even higher on VIX and on bulls/bears. They are secondary indicators and can tip you off to a potential change in the market, but they are obviously not the change in the market. You still have to see the leaders take off and the market break higher.

Thus while Wednesday was a middle of the road follow through, the indices are still in their downtrends and below near resistance. They drifted lower all session but volume, already light this week, was very light again, indicating no sellers stepping in to dump stocks. Indeed, SP500 held above its trendline again, and with the low volume it looks as if it is trying to consolidate. The other indices still look like they have capped out this rebound attempt, but at least the large caps have a bit more substance from the looks of it.

So we have the indices backing off from near resistance once more, but doing so on lower trade. The price losses were significant, but it was no rollover with sellers jumping in on volume. That means the market is still at the crossroads on this rebound attempt. SOX is worth keeping an eye on; it led the move lower, but it did not roll over and dive as it has done on the prior two legs when they ran out of gas, at least not yet. The sentiment indicators are at rebound levels, the market showed a modest follow through, and SP500 appears to be attempting a consolidation over its trendline. All positives. The market, however, needs to generate some leadership and show the break over the downtrend. Despite those positives we still think there is more work to be done on the downside to get leadership better developed and get to a better time of the summer for the market to put in a rally.


May Leading Indicators hit the skids.

They were down 0.6%, and when expectations were for -0.5% that just does not seem so egregious. Compared to April's -0.1% reading, however, it has some teeth, particularly when similar gauges in Europe and Asia show those economies strengthening. For more perspective, it is the largest monthly decline since September 2005 right after Katrina slammed into Louisiana and Mississippi.

Seven of the ten indicators were lower. New jobless claims and consumer confidence were the top two negatives for the report, but the problems the Conference Board cited were many. The cumulative impact of higher gasoline prices, high energy costs for air conditioning, slowing housing, higher interest rates, lower confidence, and higher taxes in some areas are weighing on the economy. The Conference Board says that is adding up to sub-par performance for the summer. That would be late summer we surmise, given that the LEI supposedly looks 3 to 6 months down the road.

It is interesting to note that the more accurate compilation of leading indicators (in our view and based upon historical accuracy), ECRI, continues to show a slowing economy as well, but the long leading indicator is not forecasting a recession or harsh slowdown. Instead, it is leaning toward an economic slowing to just below 'potential' that the Fed has pegged (somewhat arbitrarily) at 3%. Given the issues confronting the economy and the continued inversion in the yield curve, that is not such a bad forecast.

Bond yields continue to rise, continue modest inversion.

One of the keys to the market recovery attempt, the bond yield curve has jumped sharply the past three weeks from the 10 year yield below 5% when fears of Fed overkill were running high, to a 5 year high at 5.25% for the 2 year note and 5.21% for the 10 year note. That leaves a slightly inverted to flat curve, but at a rate that is more reflective of the Fed's anticipated action late next week, i.e. a hike of the Fed Funds rate to 5.25%.

The rise in rates is a positive as we have noted the past week. The sharp dive to 5% was a sign the market had no confidence the Fed would pull off a managed slowdown. Yields were diving and the curve inverted about 10 basis points, both quite negative. Now yields are back where the Fed wants them, i.e. near the anticipated Fed Funds rate after the next meeting. The inversion is still a negative even though it has narrowed to 4 BP this week. Historically it takes a deeper inversion to indicate recession. Nonetheless, a flat to slightly inverted curve suggests a whopping 1% to 1.5% growth rate.

Now the bond market just as all markets overshoots in the near term. It overreacted to the surge in commodities and then to the Fed's new tough talk policy. The pendulum swung both ways. It is still swinging as it assesses the issues further, but just as in nature, without any further stimulus the back and forth moves eventually move to equilibrium. The modest inversion, however, has been annoyingly tenacious even as yields have moved over 20BP. That still suggests a risk that the Fed will overshoot.

Think of the two parts of the bond equations this way. As the June FOMC meeting approaches, yields (particularly the 2 year) have recovered from the sharp drop on the tough Fed talk to reflect where yields will be after the Fed raises the Fed Funds rate to 5.25%. Indeed, the 2 year closed at 5.25% on Thursday. That reflects reality for the short end of the curve that the Fed controls by virtue of the Fed Funds rate. The other half of the equation, the yield curve, reflects how the market views where the Fed action will take the economy. The first part reflects the reality of where the Fed will take short rates. The second part reflects lingering concerns about the Fed going too far. At least the 10 year has risen along with the 2 year; if not, then the odds of a significant slowdown to a recession greatly increase.



As noted above, sentiment indicators are at levels that suggest a rebound and the financial stations are widely reporting this, even saying that this typically means a rebound is coming. Throw in the Wednesday move and you have them clamoring about it. Problem is, sentiment is a finicky companion. It works best when there is rampant, wild-eyed action. When many commentators and investors calmly talk about how sentiment indicators have spiked and thus a rebound is at hand, well, the market doesn't play along. Just like on the 'Twilight Zone' when the ventriloquist begs his dummy to talk and it clams up, the market refuses to perform when everyone is watching (I was going to say watching the pot boil, but I did not want to mix metaphors).

The point: sentiment indicators are secondary indicators. They can tip you off that conditions are getting ripe for a move, but they are not the move themselves. You don't want to go out and load the boat based on them. You want to be ready to move into leaders, but you don't just rush off and do so because there are a lot of bears and not so many bulls. Remember how early on in the rebound after the October 2002 low VIX fell to low levels and many commentators said this was a negative for the market and some analysts were calling for selling out of stocks. The rally chugged on as leaders kept finding new buyers. Those commentators forgot that volatility can lie dormant for years while the market rallies.

VIX: 15.88; +0.36
VXN: 20.81; +1.15
VXO: 15.1; +0.87

Put/Call Ratio (CBOE): 1.04; +0.12. And yet another close above 1.0, one of the 18 over the past four weeks. Definitely at a level that suggests a bit too much speculation about a continued fall, but it has been this way for several weeks now.

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).


Stats: -18.22 points (-0.85%) to close at 2122.98
Volume: 1.711B (-10.44%). Volume remained well below average for the week, a sharp contrast from last week that saw mostly above average trade. Volume backed off on the selling, suggesting no distribution, i.e. no dumping of shares. Of course, there was not a lot of accumulation on the Wednesday follow through session. Price/volume action is positive this week (down on the selling, up on the buying), but overall very ho-hum and not what you see when the market is setting a major bottom.

Up Volume: 379M (-1.331B)
Down Volume: 1.294B (+1.113B)

A/D and Hi/Lo: Decliners led 1.45 to 1. Pretty much matched the session, falling to -2:1 intraday.
Previous Session: Advancers led 2.5 to 1

New Highs: 51 (0)
New Lows: 115 (-5)

The Chart:^ixic.html

NASDAQ again could not break above the 18 day EMA (2143). Indeed, it did not even try to move through the 18 day Thursday, fading from the open. A steady downtrend until mid-afternoon when it rebounded off the low (2123), still well above the support at 2100. Trying to consolidate and put in the work for a bottom here, but the follow through session was pretty darn timid and techs still need some leadership. ORCL announced earnings after hours that were a bit better than expected, and it rose modestly after hours. Modestly is the operative word. Still as the crossroads and has to show more strength to clear resistance and really move. Don't think it has it in it right now.

SOX (-1.36%) opened at the 18 day EMA (455) where it closed and sold off from there. It slightly undercut some support at 450, but not enough to mean anything. It has spent a week working laterally below the 18 day, typically good consolidating action. It is a key for the market, and if it breaks higher here it has a run to 475, and that will help trigger NASDAQ to a further move higher. Chips had a lot of positive commentary the past week regarding strong second half chip sales, INTC upgrades, chip equipment sector upgrades, but it has not given it enough to break through resistance. It has moved laterally, but good news is not delivering an upside break.


Stats: -6.6 points (-0.53%) to close at 1245.6
NYSE Volume: 1.465B (-11.74%). Volume fell back to Monday and Tuesday levels, i.e. very low and well below average. The Wednesday follow through volume was not bad relative to NASDAQ, but it was still well below average and as with NASDAQ, not a clear indication that buyers are all that enthusiastic about this attempted move higher.

A/D and Hi/Lo: Decliners led 1.89 to 1. just over -2:1 on the lows, a bit lower than you would expect for the size of the point loss.
Previous Session: Advancers led 2.88 to 1

New Highs: 28 (-7)
New Lows: 172 (+42)

The Chart:^gspc.html

After trying the 18 day EMA (1254) Wednesday, SP500 did not make the effort Thursday. It sold from the open but in the early afternoon tapped the 2003/2004/2005 up trendline (1242) and rebounded to recoup some losses. This is good consolidation action over support; indeed the whole week has been a lateral move below the 18 day EMA but above the trendline, and that is typically positive action. SP500 is definitely at the crossroads and is showing some pretty good action.

SP600 (-0.28%) fared the best, holding tight just below the 10 day EMA (361), showing a doji on the candlestick chart. The 10 day stalled it last time so this is the big test for the small caps. Consolidating similar to SP500, and as stated Wednesday, it could jump to the 200 day SMA (366) for a test before a further decline.


Modest decline on modest, below average volume. Wednesday DJ30 tapped the 50 day EMA (11,115) and retreated. Thursday it fell to the 10 day EMA (10,985), but again held that as support as it has all week. Stronger volume on the Wednesday move, but still below average and not overpowering. The 50 day and 11,100 are two layers of ice, and DJ30 is likely to test lower from there before it makes the break through that level.

Stats: -60.35 points (-0.54%) to close at 11019.11
Volume: 250M shares Thursday versus 309M shares Wednesday. No distribution on the modest test of near support at the 10 day EMA.

The chart:^dji.html


Durable goods orders are on tap a half hour into the Friday session. Expectations are for a solid recovery from the 4.4% decline in April. That may provide some momentum, but on a summer Friday in a low volume week we are not likely to get a meaningful move, i.e. one where the market tips its hand with any authority. Right now it is just trying to find some interest, and this week it has been so-so at best even with a rising volume follow through Wednesday. Even with the impressive point gains Wednesday that elicited calls of a bottom, knifepoint turn, etc., the volume nowhere near suggests the strength needed to make such a move stick.

Not a glowing overview of the market, but it is the first month of summer and this past week was definitely a summer week. Under that light volume cover the indices tried to put together an upside move, and as we have noted, it is still at the crossroads as to whether it succeeds or continues the move lower. We have gone over the positives and the negatives, and we still anticipate a struggle near term as stocks continue to work on bases for the next move. Healthcare still looks decent, internets are improving, but overall the market still has work to do to set up a sustained upside move.

Support and Resistance

NASDAQ: Closed at 2122.98
The 18 day EMA at 2143
2155 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 2203
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.

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 1245.60
The 18 day EMA at 1254
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 1271
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.

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 11,019.11
11,044 is the January high.
11,097 to 11,137 is the last peak from the February top.
The 50 day EMA at 11,115
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

The 18 day EMA at 11,017
The 10 day EMA at 10,985 held on the Thursday low
10,965 from Q4 2000
10,931 is the November 2005 high
The 200 day SMA at 10,896
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 20
Housing starts, May (8:30): 1.957M actual versus 1.870M expected, 1.863M prior
Building permits, May (8:30): 1.932 actual versus 1.950M expected, 1.973M prior

June 21
Crude oil inventories (10:30): 1.4M actual versus -980K prior

June 22
Initial jobless claims (8:30): 308K actual versus 305K expected, 297K prior (revised from 295K)
Leading economic indicators, May (10:00): -0.6% actual versus -0.5% expected, -0.1% prior

June 23
Durable goods orders, May (8:30): 0.4% expected, -4.4% prior.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

Technorati tags:

No comments: