Sunday, July 29, 2007

Rising volatility at market peaks is never a good sign.

- No one wanted to hold stocks ahead of the weekend
- Some serious issues: Volatility, Frequency of the corrections, and key sector struggles (Financials, cyclicals, and transports struggling together)
- Rising volatility at market peaks is never a good sign.
- GDP solid, inflation low, consumer confident, but credit squeezes the financial markets.
- The key test for this correction is after the relief bounce to come runs its course.

Stocks try a weak rebound, get dumped late ahead of an uncertain weekend.

Futures were lower but the strong GDP coupled with low core inflation gave the pre-market a bracer, turning stocks higher on the open. Almost immediately, however, the market was sold as sellers used the bounce to move in. That rebound enjoyed a half-life of about 30 minutes. Michigan sentiment was released and it blew past the June reading, but it did not help the market. Another bounce over lunch into the last hour, another run by sellers sent the indices negative as NASDAQ peeled off 45 points from its early high, SP500 reversed 30 points, DJ30 260 points into the close.

Credit crunch fear piled on top of mortgage fears on the week, and that ignited the selling. The market held the sellers at bay even with the mortgage worries as it waited for earnings to come out better than expected. When that did not happen there was nothing to hold back the other problems from bubbling up. When the credit issues hit Wednesday and Thursday it was too much to hold back. Earnings finally came around (AMZN, AAPL, WFR, BIDU, CVX, etc.) but it was too late. The contagion fever infected the market and when that emotion laden virus hits, as with its human infecting cousins, it simply has to run its course.

A perfect selling storm.

It wasn't just credit contagion and mortgages, however. There was something of an induced unwinding of the carry trade. The New Zealand central bank raised rates with the primary goal of driving those using the NZ dollar as part of the trade out of the NZ currency. When you look at the action of the yen (the other part of the trade), treasuries, and gold, you could tell there was massive unwinding of this play. In the earlier correction this year there was a partial unwinding and that caused the market to struggle in the spring. This is a much more dramatic unwinding and it further undermined the market weakness.

That put the hammer to the market. Since the recent peaks DJ30 is down 5.3%, NASDAQ 5.9%, and SP500 6.2%. In the spring correction they fell 6.6%, 7.9%, and 6.7% respectively. The losses from the prior correction were hit on the second leg. If we get the bounce this coming week as we anticipate, we could have a very similar pattern to the spring correction in terms of the overall losses. That would also set up some great shorts for the next leg lower. How great depends upon how much of an upside rebound we get.

In the aftermath of the week we heard the usual from both sides of the fence. The bears were calling for more downside while the bulls were saying it was no time to panic. As for the bears calling for more downside, well that tells us this leg is getting close to its bottom. As for not panicking, are you supposed to wait for another 6% down and then panic? Ha! The idea was right though the delivery was less than artful. There is never a time to panic.

You always have to fight that urge, and as always, wait for the right moment and make your move. With the gaps lower last week there was not a lot you could do with some plays. Instead of bailing out on those at the bottom we are playing the percentages, i.e. looking for the rebound that typically lasts from 3 to 5 sessions. If a stock is holding a support level after this week, even a lower support level, it is likely to put in a good bounce on a market relief rally. That will at a minimum give us a better exit point, and some stocks will continue right on up, forming a good base and moving higher. That is why when we have this kind of volatile action we have seen we take interim gains on the way up. Indeed, we always like to take interim gains after a strong run, but when things are choppy there is all the more reason.

Technical issues.

Technically the action was grim once more. Volume was lower but after that huge Thursday selling spike anything seems lower. It was still well above average on both NASDAQ and NYSE. Breadth was still poor at -2:1 and better though that was way off the -13.5:1 seen intraday Thursday on NYSE. Stocks gave up a rebound attempt in the afternoon and closed at the session low. SP500 cracked the February peak as it dove lower again while SP600 broke the 200 day SMA on the close.

Beyond the session there are some disturbing features to this pullback that the prior corrections have not shown.

Volatility is rising at market peaks. After a long dormant period volatility jumped during the spring selling. No big deal there. It fell back but landed in a higher range. It rose modestly with the market as it recovered and then jumped again in the June turbulence. The market recovered and broke higher again and volatility dropped but it also moved higher with the market's gain.

We talked early in the year about volatility and when it becomes an issue warranting concern. We said to watch for rising volatility as the market rises as a sign of a more significant top. With volatility on a slow rise with the market and then shooting past the spring levels we have to watch closely how this next rally and subsequent down leg play out. It will likely be a good time to go to cash on the upside and then look for downside shots if we see volatility continue its trend higher during the next upside bounce.

Frequency of corrections is another issue. There was the summer 2006 correction and then the run into the spring where there was no correction, hiccup or otherwise. Two months later the June double bottom and a convincing looking breakout just over two weeks back. Then in July a sell off that quickly reversed the breakout and in its first week is already matching the spring downside fling. The market is having a harder time making upside moves stick, and a big breakout that is reversed in short order is never a good sign.

Leadership. There are still strong stocks across the market in excellent shape even after a week of heavy market selling. It is always a good sign when there are stocks that shrug off selling and go about their business such as CELG, NVDA, BG, etc. At the same time, however, financials are in the toilet and have been for all of July; some of them longer than that. Cyclical stocks (e.g. raw materials, durables, autos) are in the tank as well, starting their selling well before the past week's downside romp. When those two sectors decline in tandem history says beware as there may be something more serious ahead even if GDP looks good. Throw in some reports we are hearing from the truckers that tonnage never really picked up through the holidays after starting to decline in late summer 2006 (as we reported at the time) and indeed that some are saying there is a freight recession over the past six months, and you have some serious issues that historically do not bode well for the economy and thus the market. And of course, the market prices it in ahead of the economic news.

That said, after this week of selling, the size of the losses to this point, and the weak, disappointing close, the downside actually looks about tapped out on this leg. Another push down Monday and that would likely bring in some covering and a relief bounce. When that runs its course after roughly a week then we need to batten down the hatches and see how these massive undercurrents swirling through the world economies and markets plays out. Of course we will play the downside on that move and if it really breaks we will be able to take the rest of the summer off and then play the upside run on the backside of the year.


Q2 GDP as solid as expected.

At 3.4% the first iteration of the second quarter output was better than the 3.2% expected, and blew away the meager 0.6% bump higher in Q1. Fastest growth since Q1 2006, not surprising since the economy suffered that mid-cycle slowdown the second half of that year.

There was some bad news in the report, however. Personal spending slowed to 1.3%, well off the 3.7% in Q4 2006 and Q1 2007. Even that 3.7% was revised lower. Government spending jumped to 4.2% from 1% in Q1, and government spending is not really a positive for GDP growth given government spending is inefficient to begin with and is made from tax dollars that were taken from the private economy. Moreover, exports jumped and imports fell, pumping up the GDP number but also underscoring the slowing consumption at home.

Offsetting the consumer slowdown was the continued rise in business investment. After slowing to end 2006 and the start of 2007, businesses started buying again, showing an 8.1% gain in the quarter, easily topping 2.1% in Q1 and -1.4% in Q4 2006. Indeed, those Q4 and Q1 readings really look to be the outriders because before that Q4 decline business investment rose 5.1% in Q3 and 4.2% in Q2.

In addition, inflation, at least at the core level, remained under control in Q2. Indeed, it improved over Q1. In Q1 the year/year core PCE was 2.4%, well out of the Fed's 1% to 2% 'comfort zone.' That hurt. The economy was slower with its 0.6% growth rate and yet inflation jumped. Stagflation comments were heard as Phillips Curve worshippers were dazed and confused. Then Q2 with its 3.4% growth rate and the core PCE fell to 1.4% year/year. How is that possible? We have covered this before: growth resolves inflation issues because supply is humming along and it is able to meet demand where it rises. When you have a slowdown in supply as seen in Q4 and Q1, that is when inflation pressures rise. That is why it is absurd for the Fed to try and slow the economy as a way of curbing inflation.

Sentiment rises but not as much as anticipated.

Michigan sentiment (final) for July clocked in at 90.4, down from the 92.4 originally reported but still a significant improvement over June's 85.3. This is the best showing in 5 months, reflecting a 9% jump in expectations and a more modest 2% increase in the present situation measure. The improvement is attributed to a bit lower gasoline prices, a solid labor market, and a better economic outlook versus the housing market slowdown. Interestingly, expectations are holding their trend higher, resuming the move after a June slowdown. Of the two components, it is always good to have a consumer looking for better times down the road.

Of course if the housing market was the drag in July, it will be a drag in August as well given the market worries related to it. On top of that the credit issues will be on consumers' minds. Not in the sense they understand that there is a worldwide credit squeeze right now, but more in the general sense that the stock market is selling as a result of that issue. That creates uncertainty in the consumer, and as with the investor, uncertainty tends to discourage buying.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Monday, July 16, 2007

Modest gains cap an important breakout week

- Modest gains cap an important breakout week.
- Consumers get weary as June retail sales turn sluggish on steadily higher gasoline prices and housing weakness
- Business sales are not slowing but are increasing.
- Thursday breakout trying to spread out the gains and improve a flattening A/D line

Stocks add to Thursday gains in a quiet session.

After the Thursday fireworks you expected a quieter session, and that was Friday. Quiet but up. Retail sales were mushy after better than expected (but still so-so) same store sales. The sales report and a slight hangover from the Thursday blowout started the session indecisive, and an oil price topping $74/bbl intraday (closed at 73.93, +1.43) did not help. Nonetheless, after some morning chop the indices started a slow steady climb to positive territory. Nothing spectacular, but again, the fireworks were Thursday and the Friday session was more of a cleanup day.

The big news was Thursday with the strong breakout from the 7 week choppy, lateral move that threatened to break SP500. That move showed a bit of everything with its low volume ascents, its distribution, breaks of trendlines, faltering large cap and small cap leadership. It was also just two months out from the February and March 3% correction, and its proximity raised questions as to the market's ability to continue the rally.

As in March, however, with that month's low volume climbs punctuated by distribution sessions, the market weathered June's short comings and broke to new highs. With the US economy on the rebound from its mid-cycle slowdown and continued world liquidity in the form of new wealth in India, China, Brazil, and of course petro-dollars requiring a home, the market found its bid once more, and found it in a big way.

Technically the Friday action was a non-event with lower volume, flat breadth and modest gains. Leadership was moving again, however, as GRMN, CMI and friends were on the move yet again. More than that, the moved broadened out as techs cemented their new leadership role and were even joined by SP500 as it found its legs, recovered, and then joined NASDAQ and DJ30 with its own new highs on Thursday and Friday. Even SP600 moved to a new all-time high. The move into tech while keeping, for the most part, with the existing leadership in energy, metals, materials and basically anything to do with the world infrastructure build out, was key. The 'new' growth stocks that have led this rally, i.e. the 'old economy' stocks of the 1990's that are the 'new economy' stocks as the world builds out, are now joined by tech. That movement or rotation into other areas is crucial for the continuing success of the rally. The Friday numbers didn't show it, but the pattern for the past three weeks does as NASDAQ held its trend and then rose to the first new high following the June malaise.


Retail sales growth trend flattens.

Same store sales were better than pretty lukewarm expectations, but June retail sales overall were worse than thought. With expectations of flat sales, the -0.9% showing was quite disappointing. Take out autos and the damage moderated, but it was still -0.4% versus an expected 0.2% gain. That was the largest drop in 2 years, but then again, May was the biggest gain in over a year. March and May were much stronger than expected while April and June were much weaker.

The upshot is that the trend is still up but flattening as the mid-cycle slowdown came to an end. That is not as unusual as it sounds. The consumer moves in cycles just as other segments of the economy, and with oil prices moving into the seventies and gasoline prices holding just below the $3/gallon level, the consumer, just as women sometimes do, is getting weary.

Weary for now. The backdrop still shows a strong jobs front as many companies are finding it hard to attract the kind of talent they need. With a strong jobs market the consume rarely ceases spending. More than any other factor, the fear of the pink slip is what drives consumption. Gasoline and housing prices may have their impact, but if a consumer is confident about his or her job, lay your bets on continued consumption. It does not hurt that consumer sentiment remains strong. While sentiment and actual consumption are not directly correlated, it is good to see the consumer still confident, and indeed growing in confidence, as the Michigan sentiment final report for July indicated on Friday (92.4 versus the 85.3 prior).

Business sales continue to grow.

While the headlines Friday focused on the retail sales aspect, the market appeared to pick up on the other story that was the backbone of the Friday economic data: strong business sales. The consumer is important, but as we saw in the last recession, if you don't have business spending you don't have a good economy. In 2000 and 2001 the consumer was not running wild, but he was not slowing much either. With the post-September 11 home remodeling and cocooning effect, sales of homes and home-related merchandise prospered even as economic activity turned negative. The complete lack of business investment in the aftermath of the Fed-induced investment collapse left the economy gasping. There was no capital investment for three years, not until the second Bush tax cuts were passed that provided the incentive to buy equipment even though the real need was not there. That jumpstarted a new wave of investment and brought the economy back.

While retail sales were lower, business sales surged, up 1.3% in May or 16.5% annualized. Unlike retail sales, business sales are growing and growing and growing in strength. From December 2006, retail sales have posted annualized gains of 6.5%, 3.9%, 3.6%, 4.5% 11,7% and 16.5% in May. For the past three months that is 16.3% growth. Sure the economy needs both the consumer and retail to prosper, but with continuing strength in the business sector that means continued job creation. As discussed above, jobs equal consumer strength. Thus with businesses buying and investing, that is only good for the jobs picture. Thus we anticipate continued economic expansion. Indeed, looking at the ECRI indicator, it continues to post gains and predicts in the words of its compiler, 'fairly healthy' economic growth.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, July 08, 2007

Market fends off higher oil and interest rate roller coaster

- Market fends off higher oil and interest rate roller coaster, closes a positive week positive.
- What a surprise: jobs top expectations, following the economy back up.
- Economy is improving, so are earnings expectations again too low?
- This current rebound looks a lot like March.

NASDAQ still on the point as market closes out an upside holiday week with more gains.

Despite strong manufacturing and service reports, despite solid personal spending and income, despite lower inflation, the jobs report remains a market focus, at least so it seems. Jobs, however, are nothing, nothing, without the rest of the economy on an expansion. Thus as the non-farm payrolls came in a bit above expectations while May and April were revised higher, all the report showed was that jobs skated over the second half 2006/Q1 2007 slowdown without missing a step. In other words, there was no panic from businesses as they continued to hire right on through the slow patch (to borrow a Greenspan-ism).

Jobs ARE important at this stage, not because they are a leading indicator, but because they keep the consumer consuming even in a down housing market. More on this later, but suffice it to say that jobs were good enough to confirm to those that view jobs as some sort of leading indicator that the economy is good enough.

The fact that housing was strong and supposedly confirmed what the leading indicators were telling us rattled the market at first. Futures fell while bond yields leapt back up. After a 5% handle early in the week they closed out the day at 5.18%, that after bouncing off 5.20% early in the session. Stronger economy means less chance of a Fed rate cut (gee, who would have thought?) and thus the rise in bond rates. The pendulum has swung back, and now it is right back at the other end of the 10 year's trading range.

Even with the bond issues and oil finishing the week over $72/bbl ($72.65, +0.84), stocks managed to rally and close positive, closing out a week of upside gains. Leadership continued to emerge as tech broke to a new post-2002 closing high Tuesday and kept on climbing to the close. Friday saw a return of some of the early leaders such as energy and metals as well, and of course the Chinese net stocks were surging once more with CTRP and BIDU still surging higher.

The Friday move capped a week of gains that started with the new quarter. Many solid stocks gapped higher to start the week and continued rising right on through the Friday close. The week saw NASDAQ move further into the lead when the market needed it to, spelling the NYSE large cap indices and showing the market has some healthy attributes outside of the old yet new economy industrials as money rotated to a new area. There were some volume movers and we bought into some and we took some gain as well.

The snag of course was the lack of volume on the move. Overall trade was holiday light for the entire week. Hard to complain about it with NASDAQ finally moving to the lead. Many times the market moves as a precursor to better news or times ahead. Hence the rally that started last August even as the economy slipped into a mid-cycle slowdown. NASDAQ did assume the leadership role and as is often the case, it is pulling the other indices with it even as they consolidate their strong gains as they led the market higher. The roles are reversed right now; not too far back NASDAQ was simply tagging along, following the large cap NYSE stocks higher.

Of course the light trade still begs the question whether the move will hold next week when the big money managers return and earnings reports start up. Some upside volume would help after these low volume gains. Prior to that, however, we anticipate a pullback to test the move, kind of some cold feet ahead of the earnings season.


Non-Farm payrolls top expectations at 132K, show no slowdown the business side . . . and no inflation.

Non-farm payrolls topped expectations by 7K, but part of the real punch to the report was the upside revision of April and May that added another 75K jobs to the prior totals. Hourly wages rose 3.9% year/year after an upward revision to 4% in May. That is the other extreme of the debate from those saying a recession is just ahead. The Phillips Curvers view solid jobs and rising wages as inflationary despite what economic history shows. Wages tend to rise in a stronger economy; always have.

Moreover, the leading inflation indicators, the ones that actually accurately predict inflation (e.g. ECRI) as opposed to the gut-feeling guesses about wages and the so-called 'wealth effect' indicators, show continued declining inflation pressures. They showed a peak in the inflation pressures in October 2005 and though it took awhile before actual inflation started to fall, it is doing so with the PCE now within the Fed's comfort zone. The leading inflation pressure indicators continue to decline even now with the latest ECRI read (June) showing inflation pressures at its lowest level in 2 years. With inflation already in the Fed's comfort zone, this is telling those who care to look and accurately see the future that inflation is not an issue.

Jobs, housing, and the consumer.

As I started to comment above, jobs ARE important at this stage, not because they indicate what the economy is going to do, but because of all of the worry about what the poor consumer is going to do with the tanking housing market and all that mountain of debt that is purportedly burying them up to their necks. We hear on a daily basis prognoses of an imminent consumer collapse due to these among other issues. What the jobs report and unemployment report tell us is that consumers still have their jobs, they were not in any threat of losing their jobs during the slowdown, and with the economy expanding once more they are not going to lose their jobs. History shows us that a comfortable employee who fears no pink slip will continue to consume. Thus the jobs report confirmed the continued strength in the employment picture and thus the highly unlikely consequence the consumer is about to go turtle.

In addition to history there is another common sense consideration with respect to the consumer and housing. Let's say there is a serious housing slowdown, one much worse than the one we have now. After all the housing market was very strong, stronger than typical, and while the numbers are slowing fast, they are taking housing back down to more normal levels. Further, as we have discussed before, housing always leads a recovery and then falls off as the economic expansion matures. Housing was stronger and lasted longer this time because of 9-11 and artificially low Greenspan interest rates, but now because interest rates are rising as a RESULT OF MARKET ACTION, housing is tailing off. No big mystery here.

Now to the common sense consideration. If a consumer does lose his or her house but still has a job because the economy continues to expand (as the numbers are showing it is doing despite the housing fade), is that consumer going to work harder or work less? Arthur Laffer, one of the great economists since Milton Friedman, posits this question to those claiming the economy will sink due to consumer angst if the housing market continues to crumble. Common sense says the consumer will work harder to get ahead once again. That means the consumer continues consuming as he or she looks to get back to owning a home once again.

The real threat to the economy.

Inflation is not the problem; that battle is won for this cycle as long as the Fed doesn't get stupid and panic when some unforeseen event arises or if the economy continues to strengthen and it decides it has to tighten. Thus far Bernanke has been quite adept at gauging when to act either to tighten or to hold steady. At some point he will have to make the cut decision; the economy has remained strong enough, however, to avoid having to do that.

The real problem facing the economy is one we have discussed many times in the past: foolish policy decisions raising out of a political campaign and a Congress that took office with the idea it has some sort of mandate yet cannot seem to do one damn thing other than talk and bluster. The latter is not bad at all, but we are worried it is going to breed a sense of desperation that something, anything, needs to be done to show us all that the new power in the Congress is not in need of Viagra (i.e. is impotent). Congress does bad things when that mood takes over.

Right now the campaign trail is hot on protectionism. Friday perennial democratic presidential candidate and first class trade protectionist Dick Gephardt threw his support to Hillary Clinton. Clinton has been on the campaign trail talking a protectionist agenda. Clinton and Obama are co-sponsoring a China trade bashing bill; that is how bad it is right now. That is in addition to Schumer's repeated threats to take it to China. Where is Bill Clinton, the free-trade president? How could Hillary be so polar opposite in her views? Ironic isn't it? Many democrats in Congress pine for the days of the 'right' tax rates under Clinton yet they toss out all of the other policies he implemented that encouraged the expansion despite Clinton's tax hikes, e.g. free traded (NAFTA) and the capital gains tax cuts.

Protectionism strikes a sympathetic chord with the US worker. What is wrong, after all, with trying to save some US jobs? We have discussed before the need to invest in the future and in new technologies as opposed to trying to save some underwear and other low tech jobs. We should invest more in those technologies and getting the underwear makers better trained and educated to help push us into the future.

Instead we fall back on protectionism, thinking that will solve our problems. It won't. We blocked the Chinese national oil company from buying a US oil company. We block Dubai, our best ally in the Middle East, the one that lets us base operations in its country, from entering into a port management deal; not ownership, just management. There are valid policy issues in deciding to let these transactions pass or not, but it all sounds very 1980's and the Japan bashing. Japan was going to own all of the real estate in the US. Wesley Snipes and Sean Connery even starred in a movie with that theme. Guess what? It didn't happen. Japan spent a lot of money here in the US on treasuries and goods, and that allowed us to build our defenses and outspend the USSR into economic ruin. In the end we got what we wanted, we got some great technology as a result that pushed us into the technology lead, and Japan had to sell everything it bought when its country slipped over the brink.

Have you noticed the slide in the dollar? Countries are starting to diversify out of the dollar into other currencies and thus it is losing some of its mojo. Why are they diversifying? Not because the dollar is no longer a safe and solid store of value; after all the US economy is still the safest and best year in and year out. No, they started to do it when we started taking on a protectionist tint in our policies. China started to diversify after we blocked the CNOOC deal. The dollar took a further hit after the Dubai deal was killed. Foreign investors watched and they saw the US rebuff its best ally in the Middle East. If we would do that to Dubai we would do it to anyone. Now Clinton is proposing that China and others cannot own more than a certain percentage of TREASURIES (we are not even talking about real estate or companies). That is crazy and the rest of the world is watching. These actions are making the US a less desirable place to recycle petro and trade dollars and thus the demand for dollars has dropped and ergo the dollar's value. If they cannot use or recycle their dollars into US assets they are not going to prop up our trade deficit.

The sum total of this policy train wreck is a cheapening of the dollar. Thus far it has been an 'orderly' slide, i.e. not a massive tank. The move thus far, however, is inexorably lower, and with this protectionist fervor in the new congressional leadership, it is not going to improve. Bush can say he will veto any such action, but the foreign investors know an election is coming and that the GOP is on the ropes. Thus a veto won't do a whole lot of good near term.



VIX: 14.72; -0.76
VXN: 16.52; -0.57
VXO: 14.31; -0.42

Put/Call Ratio (CBOE): 0.88; -0.02

Bulls versus Bears:

Bulls: 49.4%. Now that is quite a drop from 53.8% the prior week and well off the spike to 56.7% a month back. Heading in the right direction but still needs to be lower to get to a comfort level. The 55% level is considered bearish, and it topped that level on this last run. Still off the 60% hit in December 2006 but getting closer. For reference it bottomed in the summer 2006 near 36%.

Bears: 18.0%. Bulls may be falling, but bears are as well, and that leaves the indicator mixed and thus less than an good signal. Quite a drop from 20.4%, and now at the lowest level on this cycle (hit 18.9% a month back). After hitting near 30% in March it has faded back in the subsequent rebound and this current selling is not jumping it higher. Looking only at this indication and the fact it has not risen as it did in March when the selling took hold, you would conclude that there is more selling to go. Well off the 27.5% hit in April. For reference, it hit a post-2002 high in that late June 2006 move (hit near 36%), eclipsing 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: +9.86 points (+0.37%) to close at 2666.51
Volume: 1.629B (-1.77%). Volume was down yet again as NASDAQ moved to a new post-2002 high. No volume on this move leaves it susceptible to a pullback when everyone gets back into the market.

Up Volume: 999.629M (-51.497M)
Down Volume: 593.318M (+11.069M)

A/D and Hi/Lo: Advancers led 1.38 to 1. Weak all week.
Previous Session: Decliners led 1.01 to 1

New Highs: 109 (-2)
New Lows: 30 (-6)


NASDAQ continued its move above the upper channel line and its third session at a new post-2002 high. NASDAQ has now done what DJ30 did earlier, i.e. move through its upper channel, something SP500 could not do. The low volume shows the buyers were in charge but not in command. When the rest of the managers return this week and the new money for the month has been put to work NASDAQ will need a test. That is not bad as indicated last week as NASDAQ is in a position of strength, coming back to test the breakout versus failing at the resistance and having to regroup to take it on once more. With more managers coming back to the market in a new quarter we could see some more upside before that happens.

SOX (+1.04%) put on a solid show as well, reclaiming its breakout. As the techs improve the beaten up chips are making a move . . . again. This time we see if they can hold.


Stats: +5.04 points (+0.33%) to close at 1530.44
NYSE Volume: 1.247B (-9.28%). Volume was lower than Thursday but that only meant it was still very weak, well below average volume. All week was holiday light as NYSE indices moved higher.

Up Volume: 869.679M (+192.465M)
Down Volume: 356.679M (-318.017M)

A/D and Hi/Lo: Advancers led 1.52 to 1. Modest breadth to the upside once more.
Previous Session: Decliners led 1.2 to 1

New Highs: 177 (+38)
New Lows: 13 (-6)


This past week saw SP500 move up off the 50 day EMA and actually close above its November/February up trendline. It still has to deal with the June twin peaks; it closed 7 points off the mid-June intraday high so it is definitely in the zone to make a run to the former highs. More volume would help the move along, but when you look back at the March recovery from that selling, light volume plagued the recovery. We say plagued because we worried about it quite a bit, but the SP500 stocks kept moving higher so we kept buying them. Turned out okay.

SP600 (+0.08%) tried the mid-June high but could not punch through, showing a tight doji on the session. After a move higher that candlestick pattern shows some slowing momentum. A lateral move here for a few sessions sets up a breakout attempt as that gives it a bit of a breather.


The blue chips moved higher as well on their own low volume, continuing the move higher, but also working laterally as they approach the mid-June peak, the lower of the June twin peaks. Similar to SP600, a lateral move for a couple of sessions sets up a run at those highs. As noted last week, DJ30 is improving its pattern, setting up a breakout attempt.

Stats: +45.84 points (+0.34%) to close at 13611.68
Volume: 176M shares Friday versus 188M shares Thursday. Low volume on the upside advance, but not a really bad indicator as DJ30 is forming something of a handle here.



Earnings estimates may be a tad low . . . again.

Current projections for Q2 earnings are a 4.5% year/year growth rate, well off the previous string of gains. Q1 was supposed to be the first significant slowdown in earnings growth of this expansion with projections ranging from 3% to 6% growth. Instead earnings almost turned in another double digit quarter on the S&P.

Looking back at GDP growth rates for Q1 about all you can say is that it was quite crappy at 0.2%. Yet earnings almost hit a 10% growth rate. From what we can tell about Q2 right now, GDP is running in a range around 3% with an outside shot at 3.5%. The economy is expanding briskly again after a 3 quarter fade. We are expecting earnings to expand with it, at least more than expected in the range of 7% to 8%. As noted Thursday, the number of warnings has been quite low.

That leaves investors and analysts susceptible to an upside surprise, and that did wonders for the market in April and May. The only issue we see is that the market has rallied ahead of earnings, particularly NASDAQ with its breakout to a new post-2002 high. That always leaves stocks susceptible to a pullback ahead of or on the news. You know the old saying, anticipation is more fun than actually having. That leaves an opening for some giveback this week before earnings really ramp up.

That could be viewed as a problem, but given the gap higher to start last week and the low volume move higher, we did not chase a lot of positions. On a test, however, we get a passel of good buy points on some very good stocks, many that we had on the report but did not want to chase on low volume. We love the first test of the break higher, and a fade to start the coming week would set up stocks nicely for the meat of earnings that comes in the following week. The end of the week saw a rebound in not only the 'old' leaders of this move, but more technology stocks setting up to move higher. That bodes well for the market as money rotates or spreads out into new areas.

A familiar look.

As noted above, the low volume rise is a concern because low volume means that buyers were not really that strong on the move higher. It is not hard for some sellers to enter and sweep things back down. The question is will the sellers give it a shot or did they shoot their best shot in the two pullbacks in June.

March saw some high volume selling that pushed the indices down just over 3%. Then a double bottom and a recovery on very low, below average volume. Nonetheless the indices moved higher and higher on low trade. Leadership in energy, metals, materials and other industrials was enough as those areas got the money and the volume. We could be looking at the same thing here as the leaders in industry and now tech started to move higher together. Thus a bit of a pullback to start the week would be a very fortuitous event. If it doesn't come and stocks continue higher we will pick up the movers in good position to make us solid green.

Support and Resistance

NASDAQ: Closed at 2666.51
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak

2638 is the top of the November/February channel
2634.60 is the June peak
2632 is the November/February up trendline
The 18 day EMA at 2615
2601 is the mid-May intraday peak.
The 50 day EMA at 2578
2577 is the October/December/January trendline
2531.42 is the February high (post-2002 high); 2525 intraday
2523 was price resistance November 2000
2509 is the January 2007 high

S&P 500: Closed at 1530.44
1527 is the late November to February up trendline
1528 is the March 2000 closing high
1541 is the June high.
1553 intraday high from March 2000 is the all-time index peak

The 18 day EMA at 1516
The 50 day SMA at 1512
The 50 day EMA at 1504
1490.72 is the early June closing low
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
1440 is the mid-January high

Dow: Closed at 13,611.68
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)

The mid-May peak at 13,556
13,490 is the upper channel line in the November/February channel
13,435 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,348
The 90 day SMA at 13,000
12,796 at the February 2007 high
12,700 is the early February peak intraday high

Economic Calendar

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

July 6
Non-farm payrolls, June (8:30): 132K actual versus 125K expected, 190K prior (revised from 157K)
Unemployment rate (8:30): 4.5% actual versus 4.5% expected, 4.5% prior
Hourly earnings (8:30): 0.3% actual versus 0.3% expected, 0.4% prior (revised from 0.3%)
Average workweek (8:30): 33.9 actual versus 33.9 expected, 33.8 prior (revised from 33.9)

July 9
Consumer Credit, May (3:00): $6.0B expected, $2.6B prior

July 10
Wholesale Inventories, May (10:00): 0.4% expected, 0.3% prior

July 11
Oil inventories (10:30): 315K prior

July 12
Initial jobless claims (8:30): 318K prior

July 13
Import prices, June (8:30): 0.5% prior
Export Prices, June (8:30): 0.2% prior
Retail sales, June (8:30): 0.3% expected, 1.4% prior
Retail sales ex-autos, June (8:30): 0.2% expected, 1.3% prior
Business inventories, May (10:00): 0.3% expected, 0.4% prior
Michigan sentiment, preliminary, July (86.0 expected, 85.3 prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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