Will Chips Lead the Bounce?

SUMMARY:
- Perhaps market had priced in a weaker jobs report, but no other catalyst emerged to spur buyers.
- Jobs report sports lower unemployment rate but only because 650K job seekers gave up the search.
- Housing remains weak, jobs remain weak as manufacturing tries to hold up the entire economy.
- Heavily oversold market still in search of a bounce to test SP500's prior lows. Will the chips lead the bounce?

Stocks overcome weak jobs report, post gains, then give them up.

We were not expecting Friday to tell the entire story about the SP500's bounce to test the break below the prior 2010 lows. We were, however, at least expecting it to make a game of it and put in some work toward making its way up those lows.

Stocks started better, though just slightly. That early gain did not last, however, and stocks slid into a midday slump with all indices lower. Another upside attempt surfaced in the afternoon session and stocks drove back up to positive, holding the move with just 15 minutes left to the bell. Looked positive, but in the last five minutes selling hit and hit hard, pushing the indices back to negative across the board.

NASDAQ -9.5 (-0.46%); DJ30 -46 (-0.47%); SP500 -4.79 (-0.47%); SOX -0.45%; SP600 -0.80%; NASD 100 -0.35%. Very even declines across the board, outside of the small caps, and very modest volume as well.

The jobs report was all the buzz and it was basically a dud as the economy lost 125K jobs. The private sector gained 83K but with 450K new jobless claims each week the bleeding continues overall. Sure the unemployment rate fell to 9.5% from 9.7%, but that was due to 650K job seekers giving up and leaving the jobs pool. Thus the Administration's comments about the rate were simply hollow and indeed almost specious. Unemployment would drop like a stone if everyone gave up looking for work, but that doesn't mean the economy is in great shape and that everyone will be cared for. Absurd but that is what we are fed today by our fearless leaders.


OTHER MARKETS.

The Thursday dump lower by gold and the dollar abated some Friday, but they did not reverse. There was no sudden response after some positions were apparently unwound in gold and the euro on Thursday, suggesting other forces at work.

Dollar. The dollar tried to rally Friday and did . . . for awhile. It broke back over the 50 day EMA it gave up Thursday but by the close gave it up again along with a bit more ground (1.2548 versus 1.2522 Thursday). Thursday a short position in the euro was unwound. What we are also hearing is that the ECB's renewal of its loan facilities to EU banks at the same interest rate (1%), because it is shorter term and is expected to be a series of loans, is deemed to be a rate hike (e.g. 4 loan periods at 1% versus 1 longer one at 1%). Thus additional pressure on the dollar and strength in the euro.

Is the dollar's run over? The reason the dollar rose was the economic problems in Europe and the ECB's turn from just an inflation fighter to a stimulus maker. With the ECB willing to print a lot of money that made it just like the US Fed. Then it was a question of stronger economies given both central banks were willing to print what it deemed necessary. With the US economy on the upswing and the EU economies in turmoil, money flowed to the dollar. If that perception is no longer held, a very good reason for holding dollars over euro is not such a good reason anymore.

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Bonds. After exploding higher on the week US bonds took a pause Friday (2.98% 10 year versus 2.95% Thursday). A big breakout as the bond market absorbed some less than stellar US economic data, though the manufacturing sector held fairly tough. Economic worries in Europe fueled the April to June run. Then bonds broke out again in June, fueled by the US worries as well. Will this cause a change in bond strength similar to the dollar weakening in the face of some European austerity?

Bonds could do that, but overall bonds are telling us that the US and world economies are not looking good. Bonds are a very solid leading economic indicator; history bears them out as a harbinger of economic tidings. Thus their surge higher even as the US economy supposedly continues to improve is the warning the US economy, whether dragged by the EU or not, is going to be under pressure.

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Gold. Gold recovered some of the massive Thursday decline (1212.10, +5.40) but just a fraction as it moved up to the 50 day EMA but could go no further. That also puts gold just below the prior all-time high it broke in May and again in June. So what is happening here? A pause or a change in the weather pattern? Gold broke its near term trend started in March. This is its second sharp, big drop in 1.5 months, this second one coming right on the heels of a break to a new high, a break that failed to gain any real ground before this past week's dump lower.

I have talked of how the gold move was beyond deflation, that fear was the stronger emotion and was trumping deflation worries because if things got really bad even US bonds and the dollar would not be a good enough safe haven. Perhaps, however, deflation is the trump card. Gold has not collapsed but it has to make a strong recovery of its trend or it fades back into another base, maybe worse.

http://investmenthouse.com/ihmedia/xgld.jpeg


Oil. Oil remains in trouble as well. Friday it tried to recover some lost ground after popping its May to June trendline off the bottom of its range, but it failed, ending lower on the session (72.14, -0.11). It fell even further after hours. It rammed into some resistance at the end of the prior week as it bumped the bottom of the March range. Didn't think that would stop it but it has for now . . . along with a growing ledger of weaker economic data.

http://investmenthouse.com/ihmedia/xoil.jpeg


TECHNICAL PICTURE

INTERNALS

Volume. As you would expect volume peeled back on the Friday ahead of the July Fourth holiday weekend, falling to well below average. Down 38% on NASDAQ and 31% on NYSE. A bad two weeks in the market and no one had the stomach to do much on Friday and it showed in the volume.

Breadth. Rather ho-hum at -1.7:1 on NASDAQ and -1.4:1 on NYSE. As noted Thursday, breadth is not showing any divergence that would suggest things are getting better or worse: they are what they are, i.e. breadth is not providing any insider information.


CHARTS

SP500. SP500 tried to make the move higher and was positive at two separate times, but it could not hold the move and lost a half percent. Not much of a move on the heels of the dump lower the past two weeks that dropped SP500 120 points. As stated Wednesday and Thursday, the next important move for SP500 is the test of the break below the prior 2010 lows. That rebound and whether SP500 kisses it and fails or breaks back inside the range remains to be seen. For now with the market weakness you assume it fails as you assume the market will provide an oversold bounce from this two weeks of selling.


NASDAQ. Same look from NASDAQ as it undercut its 2010 lows as well, then tried to recover Friday, failing to hold that gain on the close. NASDAQ suffered just as hard a downdraft and now we watch for a rebound to test and see what course it strikes from there. As with the SP500, the assumption is lower, but you know what happens when you assume things.


SP600. The small caps broke support as well, but it did not make a low for the year. SP600 has performed better than its large cap brethren and thus it has defended from higher ground and has not broken to a new 2010 low. If small caps continue to hold up, that is a positive overall for the stock market and indeed the economy as the small caps are an economic predictor. Not as good as the bond market, but if the small caps are showing relative strength there is still some momentum in the economy.


SOX. The chips remain the most intriguing of the group. Unlike the other indices that have fallen out of bed to new lows for the year, SOX is not only above its 2010 low it is holding its fourth test of support at 330ish. That is a long term support level and SOX doesn't look ready to give it up. SOX could indeed lead the bounce back to the upside, whatever kind of bounce that is.


LEADERSHIP

Some leaders are showing the strain and fatigue of two weeks of market selling as they attempt to hold onto their uptrends. SNDK is hanging on but slipping, having broken its up trendline midweek and slipping Friday after bouncing back to test it. AKAM broke its up trendline as well, and though it held the 50 day EMA with a nice doji Thursday, Friday it was sliding lower. No volume, but unable to find any traction at that key level.

Chips. SNDK is a chip but a bit tired. What about the other semiconductors? XLNX is not breaking to a new high but it is in a nice base, using the pullback the past two weeks to test and set up a potential upside move. NVLS sold off as well, but it is quite interesting above support and in position for a good bounce. MCHP is similar. LRCX looks great for a bounce from the 200 day SMA. The chips are not necessarily ready to make a breakout to new highs, but they are set to lead a move higher if an oversold bounce erupts. SOX certainly looks to bounce higher off its support.


Industrials. CAT was down Friday after that nice tight doji Thursday just over the 200 day SMA, but the move did not take cat out of the picture. CAT is still in an ABCD pattern off that last surge higher from early June, and that leaves us enough room to play a nice upside move off of this pattern.



THE ECONOMY

TO VIEW THE ECONOMY VIDEO CLICK THE FOLLOWING LINK:

http://investmenthouse1.com/ihmedia/ECONOMY.wmv

Jobs report simply shows a very weak, mushy picture.

It is no wonder consumer confidence plunged over the past month: there are simply damn few jobs. No one is hiring because of the increase in taxes to come at year end when the 10 year tax cuts expire, the uncertainties with the healthcare bill and the 'unintended' taxes it will put on small businesses, the threat of cap and tax, and the talk of more taxes such as the VAT. Companies are hoarding cash, not spending it on new hires that could end up costing them more money thanks to government programs.

Thus the June report posted a net 125K loss though private payrolls did put in 83K to the upside versus 33K in May. Census workers fell 225K. Very mushy. The unemployment rate fell to 9.5% from 9.7%; some heralded this as positive, but with every such utterance the speaker only further proved his or her ignorance. The rate fell because 650,000 people gave up looking for jobs. As noted earlier, everyone can leave the job market and the rate will tumble. We just won't have anyone producing anything in the economy.


Manufacturing is the bright spot.

About all that is holding up the economy is manufacturing as it sported a less than expected 56.2 in June, but that is a quality number. Unfortunately it does not go any further than that.

Housing numbers continue to plummet, finally selling down as they wanted to originally until the credit was instituted and propped up prices. Without a sufficient recovery in jobs, however, once the props were pulled sales tumbles, prices tumbled, foreclosures jumped (31% of sales in Q1). Now finally housing may find its bottom. Quite interestingly, California prices are showing a solid rebound. California was one of the first to tumble, and before the government programs to prop up prices the California market had sold hard. It is now one of the better markets in terms of price gains.

Manufacturing is a great area to have strength. It benefits many other areas, e.g. trucking and railroads, and as reported back in March and then again in May, trucking activity is up significantly around manufacturing centers. There are tantalizing data points that show improvement, but with the overhang of taxes, healthcare, cap and trade, and who knows what else, businesses are not willing to really extend and go full bore with investment, R&D and new hires.

Thus we are going to be stuck in a lackluster recovery similar to the 1930's and the 1970's. You cannot spend your way to prosperity, at least you cannot print a bunch of money and claim to be spending your way to prosperity. If that were the case we would have the greatest surge in economic activity ever. A panel of small business owners unanimously stated today that cutting taxes and investment tax credits would be the way to spur growth. It always has. With effective tax rates of 50% to 60% (federal income, state income, federal excise, state excise, etc.), the lifeblood of our economy is being sapped. We need to get back to rewarding risk taking and achievement, not sitting on your butt awaiting your piece of the redistribution. How is that for a Fourth of July soap box speech?



THE MARKET

MARKET SENTIMENT

Some very interesting action in the VIX we have been talking about all week. Tuesday it gapped as the market gapped lower on the China news. It peaked Thursday intraday at the early June peak and reversed. Friday it gapped lower and closed near the low on the day. The import: as SP500 hit new lows for the year, VIX did not move to highs for the year. This action shows the highs have been hit for now and the market may just try to put in a quiet, and indeed quite unexpected, serious bounce. No one expects it to do so, but that is when you look for it, especially when you see this kind of action in the VIX even as the indices sold hard to new 2010 lows.

VIX: 30.12; -2.74
VXN: 32.19; -2.37
VXO: 29.7; -3.22

Put/Call Ratio (CBOE): 0.9; -0.36

Bulls versus Bears:

This past week the bearish number of investment advisors topped bullish advisors. That is a rare event and thus very noteworthy. It falls into our theme that the sentiment indicators have hit extremes and are at levels sufficient for at least a more sustained bounce in the indices.

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: 41.1% for the second straight week as bulls became pensive. They rise as the market peaked on this last selloff and held steady as the selloff raged. Talk about an inverse relationship. Fell from 43.8%, 47.2%, and 56.0% before that. This move started at a low of 35.6% in February, the lowest it has been since July 2009. 35% is the threshold level suggesting bullishness. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 33.3%. Unlike bulls, bears rose as some investors became more bearish during the market selling. Makes sense and now it is approaching the 35% level that is considered market bullish. Solid rise from the mid to upper 20's. Fell to 18.7% on the low. Hit a high of 27.8% level on the prior leg in February. Over 35% is considered bullish for the market; definitely at the lower end of the scale. Peaked near 28% in November, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: 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). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: -9.57 points (-0.46%) to close at 2091.79
Volume: 1.605B (-37.9%)

Up Volume: 494.425M (-481.473M)
Down Volume: 1.087B (-594.729M)

A/D and Hi/Lo: Decliners led 1.74 to 1
Previous Session: Decliners led 1.94 to 1

New Highs: 8 (-6)
New Lows: 136 (-117)

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: -4.79 points (-0.47%) to close at 1022.58
NYSE Volume: 1.102B (-30.95%)

Up Volume: 302.665M (-362.575M)
Down Volume: 782.483M (-114.726M)

A/D and Hi/Lo: Decliners led 1.41 to 1
Previous Session: Decliners led 1.44 to 1

New Highs: 84 (-5)
New Lows: 115 (-81)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg


DJ30

Stats: -46.05 points (-0.47%) to close at 9686.48
Volume DJ30: 199M shares Friday versus 263M shares Thursday.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


TUESDAY

Friday did even less to resolve the bounce to test versus bounce to break back to a new upside move issue as the short covering late in the session faded late. That leaves the market still oversold after the selloff, but even with that, most are still very negative on the market at this stage. Given the technical damage done that will have to be overcome (breaking back above the 2010 lows), many count it out. Given the action in the bond market that is understandable. Given the long run off the March 2009, a longer correction is understandable as well.

Thus the view is that after this selling any recovery is a bounce to test the selling. That has to be the assumption until proved otherwise.

That said, there are other interesting aspects supporting some upside move greater than a bounce to kiss the breakdown point. VIX as discussed above. Many quality stocks in position to bounce; perhaps not to breakout and run to new rally highs, but definitely in position to mount serious sustained moves.

All in all the market has not demonstrated it is ready to make a serious recovery attempt, and the bullish side of the ledger of reasons to rally is pretty thin. Thus while there will be a rebound to test, and while we are looking at some of these really solid stocks to make their rebounds, we are not looking for long term marriages unless they continue on and show us they want to stay hitched. There are some really good stocks in good setups that we will be ready to make some money with. Just how long we hold them depends upon what they and the indices do when the indices reach those prior 2010 lows. If they fail at that point we take the gain and then look to the downside to capture some more gain as we have with the SPY and DIA.


Support and Resistance

NASDAQ: Closed at 2091.79

Resistance:
2100 is the February 2010 low
2155 is the March 2008 intraday low
2167 from the July 2008 intraday low
2168 is the September 2009, intraday peak
2169 is the March 2008 closing low (double bottom)
2177 is a low from March 2008
2185 to 2195 represent support points for years: December 2004 peak, July to October 2005 consolidation, January, March and July 2008 lows, and October 2009 peak.
2205 is the November 2009 peak 2210 (from September 2008) to 2212 (the July 2009 closing low)
The 10 day EMA at 2169
2245 from July 2008 through 2260 from late 2005.
The 200 day SMA at 2253
The 50 day EMA at 2267
2275 - 2278 from the February 2008 and April 2008 lows
2273 to 2282 marks bottom of January 2010 lateral peak
2292 is a low from January 2008
2319 from the September 2008 peak
2320 to 2326.28 is the January 2010 high
2324-2370 is a range of resistance from early 2008
2382-2395 from 2008

Support:
2024 from November 2009
2020 to 2005 from the Q4 2009 peaks


S&P 500: Closed at 1022.58
Resistance:
1040 is the May 2010 low
1044 is the October 2008 intraday high AND the February 2010 low
The 10 day EMA at 1056
1070 is the late September 2009 peak
1078 is the October range low
1084 to 1080 (September 2009 peak)
1101 is the October 2009 high
1106 is the September 2008 low
The 50 day EMA at 1100
The 200 day SMA at 1112
1114 is the November 2009 peak
1119 is the early December intraday high
Bottom of the January 2010 consolidation 1131 to 1136
1133 from a September 2008 intraday low
1151 is the January 2010 peak
1156 is the Sept 2008 low
1170 is the prior March 2010 high
1174 is the May 2010 high
1181 is the April selloff low
1185 from late September 2008

Support:

1020 is the bottom of the late summer 2009 consolidation
946 from June 2009


Dow: Closed at 9686.48
Resistance:
9835 is the late September 2009 peak AND the February 2010 low
9855 is the early September peak in its lateral range
9918 is the September 2008 peak
9829 is the September 2008 closing high
The 10 day EMA at 9968
10,120 is the October 2009 peak
10,285 is the late December consolidation peak
The 50 day EMA at 10,300
The 200 day SMA at 10,361
10,365 is the late September 2008 low
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,730 is the January 2010 peak
10,920 is the recent May high
10,963 is the July 2008 low
11,100 from the 7-08 low
11,205 is the April closing high
11,734 from 11-98 peak

Support:
9774 is the May 2010 intraday low
9325 is a late 2008 interim peak
9034 from early 2009 peaks


Economic Calendar

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

June 28 - Monday
Personal Income, May (08:30): 0.4% actual versus 0.5% expected, 0.5% prior (revised from 0.4%)
Personal Spending, May (08:30): 0.2% actual versus 0.1% expected, 0.0% prior (no revisions)
PCE Prices, May (08:30): 0.2% actual versus 0.1% expected, 0.1% prior (no revisions)

June 29 - Tuesday
Case-Shiller 20-city, April (09:00): 3.81% actual versus 3.4% expected, 2.35% prior (no revisions)
Consumer Confidence, June (10:00): 52.9 actual versus 62.0 expected, 62.7 prior (revised from 63.3)

June 30 - Wednesday
ADP Employment Change, June (08:15): 13K actual versus 61K expected, 57K prior (revised from 55K)
Chicago PMI, June (09:45): 59.1 actual versus 59.0 expected, 59.7 prior (no revisions)
Crude Inventories, 06/26 (10:30): -2.01M actual versus 2.02M prior

July 01 - Thursday
Continuing Claims, 06/19 (08:30): 4616K actual versus 4510K expected, 4573K prior (revised from 4548K)
Initial Claims, 06/26 (08:30): 472K actual versus 458K expected, 459K prior (revised from 457K)
Construction Spending, May (10:00): -0.2% actual versus -0.9% expected, 2.3% prior (revised from 2.7%)
ISM Index, June (10:00): 56.2 actual versus 59.0 expected, 59.7 prior
Pending Home Sales, May (10:00): -30.0% actual versus -10.5% expected, 6.0% prior
Auto Sales, June (14:00): 4.0M expected, 3.9M prior
Truck Sales, June (14:00): 5.1M expected, 5.2M prior

July 02 - Friday
Nonfarm Payrolls, June (08:30): -125K actual versus -100K expected, 433K prior (revised from 431K)
Unemployment Rate, June (08:30): 9.5% actual versus 9.8% expected, 9.7% prior
Hourly Earnings, June (08:30): -0.1% actual versus 0.1% expected, 0.2% prior (revised from 0.3%)
Average Workweek, June (08:30): 34.1 actual versus 34.2 expected, 34.2 prior
Factory Orders, May (10:00): -1.4% actual versus -0.6% expected, 1.0% prior (revised from 1.2%)

July 06 - Tuesday
ISM Services, June (10:00): 55.0 expected, 55.4 prior

July 07 - Wednesday
Crude Inventories, 07/03 (10:30): -2.01M prior

July 08 - Thursday
Continuing Claims, 06/26 (08:30): 4600K expected, 4616K prior
Initial Claims, 07/03 (08:30): 460K expected, 472K prior
Consumer Credit, May (15:00): -$2.5B actual versus -$3.0B expected, $1.0B prior

July 09 - Friday
Wholesale Inventories, May (10:00): 0.4% expected, 0.4% prior

By: Jon Johnson, Editor
Copyright 2010 | All Rights Reserved

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

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