- Market rebounds as stocks, dollar, oil reverse their tests.
- Retail stocks showing surprising strength for an economy heading toward further angst and recession.
- Calendar says it is a tough time for stocks as they set up to resume the rally and take on key resistance.
Key market elements rebound after their tests.
After a week spent testing and retrenching following strong moves, a triumvirate of key areas resumed their new trend moves to end the week. Stocks, the dollar, and oil all had to test their recent surge, or in oil's case, purge. NASDAQ, NASDAQ 100 and SP600 spent the week testing back to key support at the 50 day EMA and 200 day SMA. The dollar tested its strong surge, finding support at a key level it just cleared. Oil rebounded to test key resistance at 122 where it bottomed in early June before exploding higher on that massive run to 147. They all found support or resistance as the case may be, and on Friday they resumed their more recent trends.
These areas all interrelate. The dollar's strength has weakened oil, breaking the spiral higher in commodities prices as the dollar spiraled lower. Lower oil, along with its failure at key resistance Friday, is breathing life into the US economy and thus stocks as indicated by the strength in small caps and consumer areas such as retail stocks. They moved in ne trends together, tested together, and then resumed the tests Friday after the tests.
There was some good news you could attribute as a trigger, e.g. some solid earnings in the retail sector (ARO, GPS, and FL) and a rumored buyout of LEH. That, however, was not the reason for the move. Stocks had tested, the dollar had tested, and oil had tested, and all were ready to resume their moves. That is what they did.
TECHNICAL. Intraday it was low to high, turning back to a more bullish picture as it should. Typically the intraday action reflects the action of the day, i.e. low to high on the upside sessions. You have to look at the transition days, those days where there was no definitely clear winner for the day. On this week the transition days showed some backbone.
INTERNALS. Solid 2.5:1 breadth on both NASDAQ and NYSE. Volume was nonexistent and you can thus downgrade the session based on that, but that is how it goes at the end of summer. There is very little trade right now and what trade there is at least shows higher trade on up sessions. Not much accumulation but some accumulation, and that keeps the rally going near. Longer term this volume no doubt that leaves the rally over the past three weeks subject to getting sold off as more money managers get involved, especially as the rally moves toward September, historically the worst month of the year for stocks. That remains to be seen. For now stocks are moving even if it is on light volume.
CHARTS. SP600 held the 200 day SMA while NASDAQ and NASDAQ 100 held the 50 day EMA and all bounced nicely. That was the key for the week, and while volume was boringly low, they held where they had to and then bounced. That sets up the move back to test those June and July highs.
LEADERSHIP. Rails are rebounding as transports are still in the leadership mix. Rails are helped by high fuel costs given they are cheaper for freight, but truckers are not in the doghouse themselves. Retail continues to improve with more and more basing up and moving higher. Economically sensitive stocks doing well, and that is the hallmark of this move. Medical and healthcare remains solid. Financials are trying to base in this up and down market action, putting in the necessary work to put in a bottom for longer term. It is still tenuous, but stocks are putting in the work to form bases.
SUMMARY. The prior week we talked of the need for SP600 and NASDAQ to test further and this past week they did just that. They went a bit deeper than the 18 day EMA, but they held key support, held tight for a couple of days in a tremendous amount of gloom, then started to bounce Friday. Sure the indices finished lower for the week, but they have done what they needed to do if they are going to make another move: consolidated the last rally, held support, and put leadership in position to bounce again to take on the prior highs and key resistance. That is about all you can ask.
Economic gloom is high yet there are market signs the economy is not as bad as thought.
Friday even Uncle Ben Bernanke voiced his concern about the US' economic future. Yes he believes inflation will mitigate over the next year, but his overriding worry was the economy would remain weak.
You hear it every day about how weak consumers are, the bad housing market, more financial shoes to fall. On top of that Europe is heading lower fast with the UK on Friday reporting a stagnant quarter of growth after a string of gains. Of course it is an election year so the economy is the target for everyone. McCain says it is fundamentally sound and it obviously is as there is not dive lower in output. Still we all know that the slowdown is real, palpable, and painful. Thus it is the punching bag.
Talk is always negative when the economy is in a decline, even if the economy is bottoming. Bottoming? Housing has bottomed even though inventories remain high. Prices are diving appropriately and starts continue to fall, holding below 1M that historically marks a bottom. It is not rebounding but it has bottomed. The data is also spinning off prior recession high levels. How many times have you heard of late that a report has hit a 1981 or 1991 high? Those were real recessions and the current levels are up there. This isn't a deep recession in terms of GDP output (though GDP is inflated thanks to exports and a weak dollar leading to less import buying) and our typical indicia of recession ending economic levels are being matched.
Further, look at those economically sensitive areas that thrive when the economy turns up. Small caps are leading this move higher. While this rally has yet to show it is more than a late summer rally for the large caps, the small cap indices are set up with higher lows to attempt a higher high. If they can do that, they show there is something more here than just an interim rally in a continuing bear market. Retail stocks have formed bases after long, ugly slides. All of the sudden they are popping higher (RL, URBN, JNY, LTD), moving nicely and on volume out of long bases that have built a solid foundation for long rallies. Transports continue to look solid having rallied already, basing/testing of late, and now ready to move back up and lead some more.
These are all inexorably tied to improving economic activity, or more to the point, anticipating improving economic activity. The economic 'stimulus' is spent yet the retail stocks were setting up even before the checks were cut and they are breaking out even after they are spent. Their breakouts are not low volume wisps of hope, but solid volume buying. That is not forecasting more economic slowing but economic recovery 5 to 9 months down the road. We are still watching the small caps closely, but thus far they are forecasting some very interesting times for the economy, and we are not talking more meltdowns in financials, at least not the kind that is going to stymie the economic recovery.
VIX: 18.81; -1.01
VXN: 22.38; -0.77
VXO: 20.47; -0.79
Bulls versus Bears:
For the second time this year bears are crossing above bulls, doing so basically where they did in March on their way to much more extreme readings just about the time the market made the March low and started the last rally. Positive for the market and if SP500 is going to hold the long term trendline is the place to do it.
This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.
Bulls: 40.7%. Still moving up, rising from 34.0%. After this week, however, bulls should post another decline. Topped the 35% level that is considered the demarcation between bullish and bearish indications. Above 35% is not as bullish. A long way up from the 27.8% on the low this round. Hit 31.9% two months back and the 30.9% low hit in March. Steep drop from a rebound high at close to 50% on the run through May. In March the indicator did its job with the dive below 35% and the crossover with the bears. Now it is going above and beyond. Bulls and bears have crossed over again, doing so even before the prior lows are hit. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.
Bears: 38.4%. Dropping hard from 43.6% and down from 50.0% a month back, the high on this move. Still above the 35% threshold so still a bearish indication. A steady rise to 50% on this move: 48.9%, 47.3%, 44.7% and 39.3% before that. A steady, strong rise. Well above the bullish level and the highest since 1995. Again, that is one of the best indications that sentiment is getting extreme on the negative side. It is again past 35%, the level that historically indicates too much pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. Up sharply from a low of 19.6% on the last rally. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.
Stats: +34.33 points (+1.44%) to close at 2414.71
Volume: 1.396B (-10.43%)
Up Volume: 1.109B (+642.193M)
Down Volume: 248.565M (-799.484M)
A/D and Hi/Lo: Advancers led 2.44 to 1
Previous Session: Decliners led 1.64 to 1
New Highs: 42 (+2)
New Lows: 92 (-14)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ, despite its decline for the week, made a higher low at the 50 day EMA Thursday, rallying that session off of that low. It then gapped higher Friday and rallied to the 200 day SMA on the close. That puts it into position to take on the August high and then the key May and June peaks at 2550. It is holding over the February high, but it needs to go ahead and make the next move. Did what it had to this past week but the work is not over.
NASDAQ 100 showed the same action for the week, even holding at the 50 day EMA and bouncing nicely off that level. Set up well to make the run at the August high and key resistance at 2000 and then the peaks at 2050.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
Stats: +14.48 points (+1.13%) to close at 1292.2
NYSE Volume: 888.139M (-2.65%)
Up Volume: 649.48M (+184.872M)
Down Volume: 233.11M (-199.54M)
A/D and Hi/Lo: Advancers led 2.54 to 1
Previous Session: Decliners led 1.23 to 1
New Highs: 17 (+8)
New Lows: 61 (-75)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
No volume (as was the case the entire week) but SP500 moved up through the 50 day EMA on the close after making a higher low this past week. Still a big struggle given the financials are still the albatross around its neck, but even the financials are basing - - though they are still way off the point where they are there.
SP600 (+1.74%) was the market leader again, making a higher low over the 200 day SMA and bouncing nicely Friday. SP600 dipped a bit more than we wanted for a run at the prior highs (400 in August, 402 in June), but it has made its test and it is in good position to do it.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
The blue chips held above the early August low and Friday put in one of the best moves. That took it up to the 50 day EMA on the close and in position to take out the August peak. Much less ambitious than the other indices, but with its market leading decline, any solid moves higher are a bonus.
Stats: +197.85 points (+1.73%) to close at 11628.06
VOLUME: 138M shares Friday versus.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
So now the market did what it needed to do, i.e. test the prior move better and bounce off support, can it make more of what Friday started? Oil tested its breakdown and folded while the dollar tested last week and rebounded. If those continue this same action that will only help to benefit stocks.
The stock market also needs to sidestep or outright avoid any further really bad news from financials. There was a lot of gloomy talk swirling last week, but as noted at the time, even with all of that gloom the market held support and then started to rally back. No great volume, a late summer move, still resistance to deal with, and September looms. Yet it showed some backbone in the face of adversity. It won't withstand truly devastating news in the financial sector, but maybe that won't come. As noted above, there are indications in certain sectors that smart money sees a recovery coming.
We will see. While we see those changes we can only take what the market is giving now, and there is continuing improvement in stock patterns as new stocks work on setting up patterns to present buying opportunities. As long as we see growth stocks setting up and then breaking higher, we will buy into the move and take what the market is giving. If the rally survives the improbability assigned to it by most commentators, huge gains await. If it cannot withstand September and fails to take out those summer highs then we close up the upside and wait for a bottom to try and form after September and sometime in late October. That means we keep watching how SP600, NASDAQ, and the cadre of leadership (retail, healthcare, tech, rails) as they continue to lead this move. We also watch how the financials set up and if they can finally form some plausible bases. The market has to have them moving higher at some point in order to sustain any recovery. Right now they are working on it, but they need the current leaders to buy them more time, and that is what the leaders have been doing.
Support and Resistance
NASDAQ: Closed at 2414.71
2419 is the January 2008 peak and the early February peak
The 200 day SMA at 2420
2451 is the August closing low
2483 is the mid-June interim peak
2500 from interim August 2007 lows and early May 2008 interim peak
2551.50 is the May peak; 2550 is the June peak
2603 is the early January gap down point
2392 is the April 2008 peak
The 90 day SMA at 2395
2388 is the June 2008 low
2386 is the August 2007 intraday low
2378 is the mid-February peak; 2379 from the October 2006 peak
2370 from the April 2006 peak
The 50 day EMA at 2367
2348 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2340 from the March 2007 low
2286 is the first April 2008 gap up point.
2261 is a March 2008 interim low
2202 is the January 2008 low
2155 is the March 2008 low
S&P 500: Closed at 1292.20
The 50 day EMA at 1291 is bending
1317 from the February low
1320 is a 50% retracement of the May to July selloff
1324 is the April low
The 90 day SMA at 1330
1331 is the June low
1351 is an ancient trendline
The 200 day SMA at 1363
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1387 is the April 2008 intraday high
1396 is the February 2008 peak
1406 is the August and November 2007 closing low
1285 is the recent July peak
1270 is the January low
1257 is the March low
1244 is an August 2005 peak
1240 to 1221 are September 2005 peaks1234 is the July 2006 low
1234 is the late July low
1224 is the June 2006 low
1176 from the Q4 2005 lows
1167 is the January 2005 low
1154 from the May 2005 lows
1142 is the 2005 closing low
Dow: Closed at 11,628.06
11,634 is the January intraday low
The 50 day EMA at 11,640
11,644 is the 2004/2005 up trendline
11,670 is the May 2006 intraday high; 11,642 closing
11,731 is the March 2008 low
11,982 is a 50% retracement of the May to July selloff
The 90 day SMA at 12,044
12,050 from the March 2007
12,070 from the early February 2008 lows
12,250 from late March 2007 lows
The 200 day SMA at 12,405
12,518 is the August intraday low
12,573 is the mid-February high
12,743 is the November low
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,786 is the February 2007 peak
12,845 is the August closing low
13,092 is the December 2007 intraday low
13,133 is the May 2008 high
11,500 is the up trendline off the July low
11,388 is the prior August low
11,317 from March 2006
11,131 is the late July 2008 low
11,061 from February 2006
10,912 peak from March 2005
10,854 from December 2004
10,701-10,705 from July 2006, July 2005
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 25 - Monday
Existing home sales, July (10:00): 4.90M expected, 4.86M prior
August 26 - Tuesday
Consumer confidence, August, (10:00): 53.0 expected, 51.9 prior
New home sales, July (10:00): 523K expected, 530K prior
FOMC minutes (2:00)
August 27 - Wednesday
Crude oil inventories (10:35): +9.39M prior
August 28 - Thursday
GDP, Q2 preliminary (8:30): 2.7% expected, 1.9% Q1
Chain deflator, Q2 (8:30): 1.1% prior
Initial jobless claims (8:30): 432K prior
August 29 - Friday
Personal income, July (8:30): -0.1% expected, +0.1% prior
Personal spending, July (8:30): 0.3% expected, 0.6% prior
Chicago PMI, August (10:00): 49.9 expected, 50.8 prior
Michigan sentiment, final August (10:00): 62.3 expected
By: Jon Johnson, Editor
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