Monday, July 01, 2013

A Day of Rest as Indices Bumped Next Resistance


- Even more Fed-speak, taper appears clearer as market ponders whether the Fed still has its back.
- A day of rest as expected as indices bump next resistance, first test in the recovery attempt.
- China up to end the week, trying to mask growing bad loan and banking problems.
- Chicago PMI hangs onto expansion but posts a precipitous drop from a likely outrider month.
- Michigan Sentiment June Final jumps expectations as hope in the US still springs eternal.
- Important week for the market is highlighted by Independence Day holiday on Thursday and Jobs report Friday.

After three days the market takes a pause at resistance.

Pretty much as expected. After three days of a solid rebound the stock indices started negative, but it took a morning fade in futures from positive in order for the rally to stall. Futures were up, looking pretty good as the rest of the world was not imploding. China actually rebounded 1.7%, a mere pittance given the precipitous decline the prior week. A bit of a bounce a la the US markets? Perhaps, but the new story from China are the bad loans that are pushing yield spreads wider and wider, no small issue for China's financial situation. If you don't think so, recall a little bad loan issue in the US back in 2007 and 2008?

Then there was the negative news. Earnings were not good. BBRY bombed results, missing expected unit sales by 800K. NKE beat the bottom line but suffered just in line top line sales revenues. BBRY was crushed; NKE enjoyed a nice gain after an early hammering on the results.

Funny thing. Earnings, the lifeblood of the stock market, were not the real story on the day. Q2 wrapped on Friday and earnings will be flowing big time in a couple of weeks in a quarter that is hoped to be over 3% GDP-wise.

No, for now the real story that drives the market is the Mr. Bernanke, the FOMC members, and what the parrot saw.

Radar: Your films came from the Tabasco Film Company in Havana, Cuba.
Henry: Tee-riff! Great, great. Yvonne, Renee and Loretta in 'What the Parrot Saw.'
Radar: What's to other one say, sir?
Henry: Uh . . . Renee, Loretta and the parrot in 'What Yvonne Saw.'

All week investors were peppered with Fed-speak, trying to explain the FOMC statement and Mr. Bernanke's text to the press following the meeting. Friday Bernanke oversaw the next round of commentary, pulling in some new faces, recycling some others from prior in the week.

Mr. Stein of the Fed fraternity came out pre-market with his take on the FOMC statement and the Fed's course of action. Mr. Stein talked the same we could do this, we could do that blather heard all week, more of the same. Then he used an example of say, perhaps starting the taper in September because the Fed isn't focusing on the last few weeks of data ahead of any FOMC meeting, but the data 'SINCE THE INCEPTION OF THE PROGRAM,' i.e. since QE started. One supposes that means since things are substantially better now than then, the Fed can start pulling back.

Okay, thanks. Apparently the market took it that way. Futures that were up were no longer up by the time the opening bell rang. They rolled over with Dow futures off over 60 points by the open.

Manufacturing data not up to snuff but Sentiment continues to hope higher.

Stocks opened and sold. At the top of the first hour Chicago PMI came in at 51.6, still above the 50 threshold level of contraction/expansion, but missing expectations of 55.5 and plummeting from 58.7 in May. Biggest month to month decline in 4 years.

Trying to break the downtrend but struggling after a double top spanning 2003 and 2010 peaks.

Note Unfilled Orders suffered the largest month to month decline since March 1974, falling to 34.4 from 53.1. Of course, it is not shown on this chart but is critical as it means production likely continues to decline from the May peak.

New Orders will need to increase in order to keep the production level and the index in expansion.

Of concern is the jump back higher in Prices Paid close to 60 yet again after a two-month hiatus.

Michigan Sentiment Final managed to pull the market's castanets out of the fire.

Michigan Sentiment, June Final (9:55): 84.1 actual versus 82.7 expected, 84.5 May

Audacity of hope? Expectations continue to lag present conditions.

Hope for a better tomorrow continues. Americans are optimistic by nature. They always hope for a better future for themselves and their children. That economic data that is not tanking (though is pathetic by US historical standards; hope they are not only historical now) is helping hope flourish. Hope, as Andy Dufresne said in 'Shawshank Redemption,' is a good thing.

Yes, when it is realistic hope. Not to be confused with 'hope and change.' Hope so often rhymes with dope, and this Fed liquidity induced recovery might not make it if the Fed peels back the monthly mainlining. Compared to massive buying each month, backing off the buys but keeping a big balance sheet is like substituting pure gasoline not with an ethanol blend, but with Kool-Aid and thinking the vehicle can still run.

Hey, but it all worked for the market. After the dip into the news it seems a Chicago PMI that was at least above 50 no matter what land speed records it set on the drop from the prior month and a 'surely it has to get better than this so let's look ahead to that time' sentiment surge were all the market needed to move back up.

Stocks recovered and rallied into midmorning, held a test over lunch, then legged it higher into the last hour. All looked good heading into the Russell rebalance, but the buy and sell orders on close didn't match up as the sells outnumbered the buys. The resultant fairly precipitous decline pushed SP500 and DJ30 negative on the session.


Disappointing? Not really. We were not expecting any upside. Indeed, the market gave exactly what we were looking for: a pause, a rest, a shakeout and recovery - - call it what you want - - after three solid upside rebound sessions took the indices to next resistance. Some queried if this action represented an exhaustion gap given SP500 and NASDAQ both gapped to the upside Tuesday through Thursday. It can be viewed as that, but likely only for this short move. Bigger picture SP500 is in a pretty nice ABCD test to the 38% Fibonacci retracement of the run from November to May. That suggests there is still a lot of momentum in the move.

More Fed-Speak: Lacker's reprise

It has the momentum; the question is whether it is enough to overcome the tightening noose of Fed action?

Friday the FOMC designated dissenter (DD) Lacker was talking again. This is Lacker's second public pronouncement of the week on the meaning of the FOMC's position since the statement's release. Wednesday Lacker sounded much more dovish and was branded a faux-dove but really didn't change his stance: he said there would be no change in rates for a long time and made no mention of QE tapering. Lacker bristled at the characterization and came out in defense of his hawk reputation Friday, warning investors to get used to 'falling markets' as they should not be too surprising. Also, prepare for more volatility as the Fed acts over the coming quarters, dropping bits of 'insight' into its policies. That doesn't sound so transparent.

I bet this fools them that I am really transparent.

In the end, the Fed-speak to clarify the Fed-speak appeared to conflict itself, leaving many to pine for the days when the Fed didn't try to be so transparent. Now it seems that the words its members utter look like rather transparent attempts to manipulate responses to their supposedly transparent statements.

Through it all the speak can be distilled to this: Taper to start in September. No touching interest rates for a long time. Don't have to; the market is pushing them up on its own. Keeping the balance sheet huge, but now the Fed wonders if just keeping the balance sheet really does control interest rates as Keynes felt (wrongly so as reality is showing).

Again I pose the question asked often of late: If the Fed pulls the QE in part over time, will the economy and thus the market manage to move higher? Heck, will they even manage to hold what they have gained thus far? Bernanke said he wanted to inflate asset prices to bring about a wealth effect. If they were inflated with QE and QE is pared back without economic growth outside what QE creates, it is axiomatic that values fall when the force driving them higher is removed or lessened.

Fed is on taper trail. Fed warns markets will fall. Is that now or later?

In short, if you take away the thing that made stock prices rise and nothing has changed economically, stock prices will fall. Hence Lacker's warning: 'Falling markets should not be too surprising.' They say don't fight the Fed. Lacker is telling you what is going to happen.

The next question is: does it happen now or later? The market sold after taper was mentioned again and it sold hard when the FOMC appeared to inscribe it into the stone of its statement. If the market synthesizes all of the Fed-speak into a belief taper is coming, then the move is likely over, at least to the straight higher, 45 degree incline in stocks as demonstrated in the November to May most recent run. I said when the FOMC came out with its statement and Bernanke's comments that the market had topped. That is a conclusion based upon a familiarity with how the market reacts vis- -vis Fed actions.

But you have to stay open, not biasing your views particularly your actions, based upon just your own views. As pointed out the past week, there are technical reasons the market can continue higher, namely the ABCD pattern at the 38% Fibonacci retracement on SP500.

This test after the 3-day bounce will tell much of the tale as to the 'when' the market will start to factor a taper into prices. It just may be that there is enough hope out there as shown in Michigan Sentiment and Consumer Confidence to keep the technical recovery moving. Unless that hope is backed up by some seriously improving economics (and not just the marginal BS the economy is showing still), any further upside move ultimately falls victim to the Fed's impending taper.




Stats: +1.38 points (+0.04%) to close at 3403.25
Volume: 2.514B (+49.31%)

Up Volume: 1.74B (+440M)
Down Volume: 1.83B (+1.461B)

A/D and Hi/Lo: Advancers led 1.02 to 1
Previous Session: Advancers led 3.47 to 1

New Highs: 145 (+21)
New Lows: 38 (+5)

Stats: -6.92 points (-0.43%) to close at 1606.28
NYSE Volume: 863M (+32.36%)

A/D and Hi/Lo: Advancers led 1.04 to 1
Previous Session: Advancers led 4.77 to 1

New Highs: 123 (+12)
New Lows: 113 (-3)

Stats: -114.89 points (-0.76%) to close at 14909.6


SP500 & DJ30: Still almost identical patterns with SP500 again bumping the B point in the ABCD pattern as well as the 50 day SMA and EMA as on Thursday. Unlike Thursday, the indices slipped back to a modest loss. Huge volume, but a rebalance day. Taking the rest we anticipated, and the resolution is key. If the Fed was not now in taper mode I would say the upside had the higher probability of winning out.

NASDAQ: Extended the move but struggled to do so. Gapped lower, recovered through the 50 day SMA, but could not stick the landing. NASDAQ remains at the lower gap point from two weeks back, basically struggling at the same level as SP500. It is also battling something of an island reversal from the gap higher in early May then that gap lower two weeks back. That makes this an extremely important test as well.

RUTX: The small caps paused with a doji at the lower gap point from a couple weeks back. The small caps look better than NASDAQ frankly.

SOX: Up on Friday as it is another index bumping into the gap point from two weeks back. Moved into the gap zone for the second session and then faded, but is holding easily in the range, now moving into the upper half. A very volatile, choppy pattern with a breakout then failure, a breakdown with no follow through, and now back right in the middle. Wild action but it has held the line.


VIX: 16.86; 0
VXN: 16.47; -0.25
VXO: 17.24; +0.54

Put/Call Ratio (CBOE): 0.96; -0.06

Bulls and Bears:

The decline from two weeks back caught up with investor confidence two week's back. After rallying the prior week into the teeth of the selling, bulls hit their lowest level since December 2012. Bears hit their highest since January. As such, this indicator is at levels that would produce upside rallies in prior points during the November run. Hate to say it, but this time it could be different given there are now doubts the Fed has the market's back. Thus this indicator may need to get to more traditional levels, e.g. less than 35% for bulls and over 35% for bears.

Bulls: 41.7% versus 46.8% versus 43.8% versus 45.8% versus 52.1% versus 54.2% versus 52.1% versus 47.9% versus 44.3% versus 47.4% versus 50.5%.

Background: Undercut 35%, the threshold for bullishness, in early June. As noted, hit 34% in early June. It did its job and the market is on the rally. Hard drop to 34 from 39.3% as economic reality and a choppy stock market hit. Off the 55+ level hit in late February. That was the highest level since April and May of 2011, the peak of the post-bear market high. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 25.0% versus 21.9% versus 22.9% versus 20.8% versus 19.8% versus 19.8% versus 19.8% versus 18.8% versus 19.6% versus 20.6% versus 20.6% versus 19.4% versus 19.6% versus 18.6% versus 18.8% versus 21.1% versus 21.1% versus 22.1% versus 21.1% versus 21.1% versus 22.3% versus 22.3% versus 23.4% versus 24.5% versus 24.5% versus 23.4% versus 25.5% versus 27.7% versus 27.7% versus 28.7% versus 27.7%.

Summary: Over 35% is the threshold to be really be a good upside indicator. 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.


An Independence Day shortened week has the market closing at 1:00ET Wednesday and all day Thursday. NYSE rules say it cannot be closed 4 days in a row so Friday the market will be open. No big event typically, but this one has the Jobs Report, and that is enough to get some traders hanging around. Not many, but some.

Midsummer, 1.5 day holiday midweek and that typically equals light volume. Light volume can mean more volatile conditions as a few can push the market a lot. Then when the High Frequency programs get going it can gyrate like a young Elvis.

Time to keep the eyes on the big picture then, and that means SP500 testing the resistance at the B point and 50 day SMA and NASDAQ at the 50 day EMA as well. The rebound was solid in price and breadth, a bit light on trade. Technically just fine in terms of the larger pattern, the ABCD at the 38% Fibonacci retracement.

Of course the market is also dominated by the Fed, and the reverberations of the deluge of comments the past two weeks are still working through stocks.

Those are the two tensions in the stock market: a still solid technical setup longer term versus the impact on the economy and thus earnings of a Fed taper. Perhaps this week will tell the story, but the holiday makes it more problematic.

We have some nice upside positions in place, some nice potential upside plays on one side. We have some nice downside positions in place, some nice potential downside plays on the other. We made money both ways this past week. Likely that won't continues as well as it has, however, because the market is going to make a decision at this key level. When it does, we go with the decision of M and use it to make money.

I said that a test at this level would allow some solid stocks to set up new buys. Those will be key to watch this week because as always the leaders lead, and if they test then blast off again, the market follows. If they test then roll over, as a group of course, the market follows.

Support and resistance

NASDAQ: Closed at 3403.25

The 50 day SMA at 3404
3470 is the November 2012 up trendline
3521 is the August 2000 low.
3532 is the early May high and 2013 high
3560 is the upper channel line for the November 2012 to present uptrend

The 50 day EMA at 3387
3371 is the early May 2013 upper gap point
3321 from April 2000
3295 is the June 2013 low selloff
The 2011 up trendline at 3265
3227 is the April 2000 intraday low
3197 is the September 2012 post-bear market high
The 200 day SMA at 3182
3171 is the October intraday high
3134 is the March 2012 post-bear market peak
3130 from some January 2013 lows
3104-3112 from August and mid-October peaks.
3101 is the August 2012 high
3090 is the mid-March interim high
3076 is the late April 2012 high and the 1/2013 low after gapping higher
3062 is the December 2012 prior peak
3042 from 5/2000 low and several other price points
3024 is the gap point from early May
3000 is the February 2012 post-bear market high
2999 is the bottom of the August 2012 consolidation
2988 is the July 2012 high
2977 to 2980 is the bottom of the late October 2012 consolidation, July 2012 peak
2962 is the April 2012 low
2950 is the mid-April closing low

S&P 500: Closed at 1606.28

The 50 day EMA at 1611
The 50 day SMA 1622
The November up trendline at 1663
1687 is the May high and post-bear market high
1738 is the upper trendline in the channel

1576 from October 2007, the prior all-time high
1569.48 is the 78% Fibonacci retracement of the April to May 2013 run
1560 is the June 2013 reversal low
1556 from July 2007
1541 is the April 2013 closing low in that pullback inside the uptrend
1539 from June 2007
1531 is the recent high
The 200 day SMA at 1510
1499 from January 2008
1475 is the September 2012 high
1471 is the October 2012 intraday high
1466 is the September 2012 closing peak and rally closing high
1440 from November 2007 closing lows
1434 from early November 2012
1433 from August 2007 closing lows
1427 is the August 2012 peak
1425 from May 2008 closing highs and the October 2012 low
1408 is the late October 2012 range closing low
1406 is the early May 2012 peak
1402.22 - 1400 is the closing low of the August 2012 lateral consolidation

Dow: Closed at 14,909.60

The 50 day EMA at 14,957
The 50 day SMA at 15,042
The November up trendline at 15,455
15,542 is the May 2013 high

14,888 is the April peak and prior all-time high
14,844 is the June intraday low
14,551 is the June 2013 intraday low on the selloff
14,198 from the October 2007 high
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation
The 200 day SMA at 14,004
13,784 is the late February 2013 closing low
13,692 from 6-2007 peak
13,668 from 12-2007 peak
13662 is the October 2012 intraday high
13,653 is the September 2012 high
13,557 to 13,662
13,413 from the late September 2012 low
13,300 to 13,331 is the August 2012 post-bear market high
13,297 is the April 2012, prior post bear market high
13,058 from the May 2008 peak on that bounce in the selling
13,056 is the February 2012 high
12,716 is the April 2012 closing low
12,524 is a range of support from early 2012 and summertime 2012

Economic Calendar

June 25 - Tuesday
Durable Orders, May (8:30): 3.6% actual versus 3.0% expected, 3.6% prior (revised from 3.5%)
Durable Goods -ex transports, May (8:30): 0.7% actual versus -0.5% expected, 1.7% prior (revised from 1.5%)
Case-Shiller 20-city, April (9:00): 12.1% actual versus 10.5% expected, 10.9% prior
FHFA Housing Price Index, April (9:00): 0.7% actual versus 1.5% prior (revised from 1.3%)
Consumer Confidence, June (10:00): 81.4 actual versus 75.0 expected, 74.3 prior (revised from 76.2)
New Home Sales, May (10:00): 476K actual versus 460K expected, 466K prior (revised from 454K)

June 26 - Wednesday
MBA Mortgage Index, 06/22 (7:00): -3.3% prior
GDP - Third Estimate, Q1 (8:30): 1.77% versus 2.4% expected, 0.4% Q4
GDP Deflator - Third, Q1 (8:30): 1.1% expected, 1.1% prior
Crude Inventories, 06/22 (10:30): 0.313M prior

June 27 - Thursday
Initial Claims, 06/22 (8:30): 346K actual versus 345K expected, 355K prior (revised from 354K)
Continuing Claims, 06/15 (8:30): 2965K actual versus 2958K expected, 2966K prior (revised from 2951K)
Personal Income, May (8:30): 0.5% actual versus 0.2% expected, 0.1% prior (revised from 0.0%)
Personal Spending, May (8:30): 0.3% actual versus 0.4% expected, -0.3% prior (revised from -0.2%)
PCE Prices - Core, May (8:30): 0.1% actual versus 0.1% expected, 0.0% prior
Pending Home Sales, May (10:00): 6.7% actual versus 1.5% expected, -0.5% prior (revised from 0.3%)
Natural Gas Inventories, 06/22 (10:30): 95 bcf actual versus 91 bcf prior

June 28 - Friday
Chicago PMI, June (9:45): 51.6 actual versus 55.5 expected, 58.7 prior
Michigan Sentiment - Final, June (9:55): 84.1 actual versus 82.7 expected, 82.7 prior

July 1 - Monday
ISM Index, June (10:00): 50.5 expected, 49.0 prior
Construction Spending, May (10:00): 0.5% expected, 0.4% prior

July 2 - Tuesday
Factory Orders, May (10:00): 2.0% expected, 1.0% prior
Auto Sales, June (14:00): 5.3M prior
Truck Sales, June (14:00): 6.8M prior

July 3 - Wednesday
MBA Mortgage Index, 06/29 (7:00): -3.0% prior
Challenger Job Cuts, June (7:30): -41.2% prior
ADP Employment Change, June (8:15): 150K expected, 135K prior
Initial Claims, 06/29 (8:30): 348K expected, 346K prior
Trade Balance, May (8:30): -$40.8B expected, -$40.3B prior
Continuing Claims, 06/15 (8:30): 2955K expected, 2965K prior
Trade Balance, May (8:30): -$40.8B expected, -$40.3B prior
ISM Services, June (10:00): 54.0 expected, 53.7 prior
Crude Inventories, 06/29 (10:30): 0.018M prior
Natural Gas Inventories, 06/29 (24:00): 95 bcf prior

July 5 - Friday
Initial Claims, 06/29 (8:30): 348K expected, 346K prior
Continuing Claims, 06/15 (8:30): 2955K expected, 2965K prior
Nonfarm Payrolls, June (8:30): 165K expected, 175K prior
Nonfarm Private Payrolls, June (8:30): 179K expected, 178K prior
Unemployment Rate, June (8:30): 7.6% expected, 7.6% prior
Hourly Earnings, June (8:30): 0.2% expected, 0.0% prior
Average Workweek, June (8:30): 34.5 expected, 34.5 prior
Natural Gas Inventories, 06/29 (10:30)

By: Jon Johnson, Editor
Copyright 2013 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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