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InvestmentHouse Weekend Market Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- Market gets slapped by a 200-person survey, and this time no late rebound.
- Producer prices slide along with Michigan sentiment.
- Another down Friday on mixed volume, but no breakdown yet.

Fragile market found a reason to sell.

The action last week lacked the strength of the previous moves. A volatile prior week with two higher volume reversal sessions acting as bookends indicated there was some change or a bit of weakening afoot. Last week volume went on holiday as the market tried to recover the prior week�s highs. Price/volume action was still good for the most part, but it was still mixed and trade plunged as the indexes tried for new highs. Lower volume recovery attempts rarely succeed, and Friday the market turned lower after the Thursday dojis.

Stocks tried to rally very early, but when the Michigan sentiment poll hit at 9:45ET with a lower reading, the market took it badly. They immediately plunged to what turned out to be the session lows. When the bell range 5 hours later they were still right there. This session there was no attempt to rally the stocks in the last hour. Well, there was, but it failed rather miserably on Nasdaq. The news was a surprise from an area where no surprise, at least a bad one, was expected. After the past two weeks the market was rather fragile, and the news put some cracks in it.

It was not a breakdown as all indexes held over their 10 day MVA and volume was mixed with NYSE volume lower and Nasdaq volume higher. That indicates a bit of distribution, but trade remained in the same lower range trod all week. The indexes held their uptrends, but the recent highs are acting as some resistance and several indexes have formed mini double tops. On top of that, many key stocks passed through the 10 day MVA, some through the 18 day MVA on rising volume. Several found trouble at the prior Friday high and have set up some potentially toppy short head and shoulders patterns. These leading stocks are the most leading indicator other than the choppy action seen the prior two weeks. For the most part they have not broken down, but they are threatening to do so. They have, however, threatened to do that earlier in the rally as well and recovered. That leaves the indexes in the same place: still firmly in the uptrend, but showing more and more signs that a deeper correction is due.

THE ECONOMY

Michigan sentiment gives investors pause.

The preliminary June sentiment report came in at 87.2, well off the 94.0 expected and even the 92.1 from May. The big swing was in future expectations that fell from 91.4 to 84.2. The overall reading runs contrary to the ABC/Money poll and the IBD/Tipp poll that were released earlier this week. What is the problem? For starters, this preliminary poll covers all of about 200 responses. Even the final monthly poll only compiles 500 or so. It is a very narrow and arguably unrepresentative universe to draw conclusions about the American consumer. The market took it bad, but the market has been primed for a bit of disruption. We suspect this poll with its too few respondents is out of line with the prior polls from the week that have several thousand respondents and that there will be upward revisions.

May wholesale prices fall on energy drop.

-0.3% overall, +0.1%. After the 1.9% April drop, the largest on record, this seemed pretty tame. Taking out energy took away some of the deflationary look as energy dropped 2.6%. Still that puts the Fed back in the wringer on the June 24 and 25 FOMC meeting. Despite talking the economy up and saying it will gladly put in more stimulus than necessary (after just 3 years of post-bubble economic ruin!), the numbers are not improving quickly or even moderately slowly. Even with much of the price decline in energy, something that will reverse itself with the June numbers, the Fed has talked itself into a corner and will have to cut. In our view it will be 50 basis points.

Energy is very important, not only in that it skewed the PPI lower. Oil is back at $30/bbl, and that is not good for the economy. The inexcusable failure to get Iraq and its millions of barrels of oil online rapidly is threatening economies all over the world once again as oil prices return to the level that can negatively impact economic growth. For economies already struggling, higher energy is not good news.

As shown by oil prices, deflation is not the only issue. Natural gas prices rose 71% in May. As with oil, that is another problem for the economy as the cost of doing business and living goes up even as other prices and the bottom line do not. Most other crude goods (not refined products) saw price increases as well along with intermediate goods (parts that are put together to make final products.

Summary: Nothing from the week indicated the economy was taking off. The Fed stands ready it says to fight off deflation, but one wonders whether a Fed that actively promoted and then allowed the recession to continue (it never got ahead of the decline with its too little, too late rate cuts) can make a difference with another rate cut. Something has to get businesses to consume. Cheaper money helps, but in the overall context of potential deflation, is it enough? The tax cuts will help some, but the extent remains to be seen; Congress got myopic when it came time to actually act on a tax package and as a result watered it down too much. The economy is still walking a thin line; the market is pricing in a recovery, but that was also based on cheaper Iraq oil. Some of those positive developments are reversing.

THE MARKET

The Thursday dojis just below the prior Friday intraday highs set the market up for some selling, and the sentiment reading was the trigger as the market reversed on that news. We were concerned about the recent highs acting as resistance given the choppier action and stocks that were running out of some gas, but the Friday selling was not a strong sell off. The indexes are still in their uptrends though sporting somewhat toppy intermediate patterns. Volume continued on the light side overall. If Friday was as intense as the selling will get, a couple of weeks consolidation would not be bad at all.

Taking a closer look and you will find some stocks down on rising volume. Quite a few semiconductors broke lower along with other tech stocks. Again it was not a complete downside romp as breadth recovered from -2:1 readings and not all sectors showed the stronger breaks lower.

At this point this is a lot of splitting hairs to us. The market has been showing clear signs it is fatigued and is going to take a breather. Too many stocks are extended in their runs, having bounced 4 and 5 times up their trendlines since breaking higher. The action, though still trending higher, is much choppier the past three to four weeks with several intraday reversals. We are coming up to the next earnings period and getting into the heat of summer, a typically slower time of the year. Volume has dropped and there will be some profit taking ahead of the next earnings round just in case.

We continue to expect a pullback. Using Nasdaq as a guide, we look for a pullback to the mid-May highs or even near 1500 at the August 2002 high. That is roughly a 10% decline, quite modest in the bigger picture. We don�t expect it all at once but look for a more orderly pullback. That could be disrupted by bad economic news or world events, but that is the risk the market runs every day. Timing is always the issue. Ralph Bloch left stocks last Tuesday. Friday some stocks started lower and we were taking some money off the table. We are going to tighten up the stops and otherwise take gains as individual stocks indicate weakness as the consolidation that started the prior week continues to progress.

Market Sentiment

The week saw the weekly investor sentiment survey increase the divergence between bulls and bears. Bulls hit 58%, bears 16%. Both are extreme levels. Sentiment can get to extremes and hold for quite some time; it is not a great timing mechanism. Combined with the other market indicators it is signaling caution.

VIX: 22.88; +0.55
XN: 34.46; +0.45

Put/Call Ratio (CBOE): 0.73; -0.13. The ratio has stayed high, popping each time there is selling.

Nasdaq

Tried to move early but sold on the sentiment numbers to the 10 day MVA.

Stats: -27.13 points (-1.64%) to close at 1626.49
Volume: 1.825B (+1.8%). Volume edged higher on the selling, a day of distribution and the third in ten sessions. That can be enough to tip the market, and given the other indications discussed all last week it looks as if the market is ready for some selling.

Up Volume: 346M (-710M)
Down Volume: 1.471B (+767M)

A/D and Hi/Lo: Decliners led 1.9 to 1. Downside breadth expanding again, the first time in a few weeks.
Previous Session: Advancers led 1.1 to 1

New Highs: 171 (-88)
New Lows: 5 (+1)

The Chart: (Click to view the chart)

Thursday and Friday Nasdaq tested toward the recent high (1684) where the index reversed on higher volume two Fridays back. That high appears to be acting as resistance as anticipated as Nasdaq reversed after the Thursday doji and solid on some rising volume. It was not a major breakdown, but the cumulative effect of 3 distribution sessions in 10 and the overall choppy action is wearing on the uptrend. It held above the 10 day MVA (1620) for five hours Friday, but the action the past three weeks resembles a short double top with the tops being reversals on rising volume. Nasdaq has every indication it is going lower, but it has fought it all the way. That is one reason we think a consolidation is going to be more orderly and hold around 1550 to 1500.

S&P 500/NYSE

The large caps turned lower before hitting the recent prior high at 1007, but volume was lower and it maintained its uptrend.

Stats: -9.9 points (-0.99%) to close at 988.61
NYSE Volume: 1.25B (-18.3%). Volume contracted on the selling as SP500 avoided a distribution session. That leaves the action mixed and that always puts a question mark as to the true nature of the session. With all of the other indications, however, we cannot take too much solace from the lighter volume. It has posted three distribution sessions in the last 12, typically not enough to cause major upset.

Up Volume: 305M (-459M)
Down Volume: 936M (+212M)

A/D and Hi/Lo: Decliners led 1.82 to 1. Negative breadth but it did recover from -2+:1 intraday. Still well below the upside breadth seen during the strong upside sessions.
Previous Session: Advancers led 1.42 to 1

New Highs: 301 (-163)
New Lows: 10 (+6)

The Chart: (Click to view the chart)

As with Nasdaq, SP500 showed a doji Thursday and Friday could not challenge the prior Friday intraday high at 1007. It turned down for the session but held a test of the 10 day MVA (982.44) as volume backed down. The large caps maintain their uptrend for now, but where Nasdaq goes they will follow.

DJ30:

Very similar action in all of the major indexes as the blue chips tried the recent high as well (9215.88) again, breaking it intraday but again giving it back. The pattern is not as toppy as Nasdaq, but it is struggling to move past the reversal session, and volume is not helping as it has trailed off as it tries that level. As previously discussed, a second try at a high on lower volume is not a bullish move. Fewer buyers as a market rallies to try an old high is not good technical action; more buyers are needed to push it through, and DJ30 was not finding those buyers last week.

Stats: -79.43 points (-0.86%) to close at 9117.12
Volume: 1.25B (-18.3%)

The Chart: (Click to view the chart)

THIS WEEK

The market finished the week on a down note again. Last week that did not stall the rally as stocks continued higher after a slow start. Indeed, the market starts the week lower, rallies, then finishes down; seems investors are getting a bit skittish about staying in positions. That is just another example of the slight shift in the uptrend.

We will say it again. Volatility equals change. The market action is more up and down the past two weeks even as the market continues its uptrend. From a nice steady uptrend with rather stable sessions the action is now more volatile intraday and daily over the past two weeks. Not massive up and down swings, but some distribution and intraday reversals popping up after a nice, steady uptrend. The market keeps surprising to the upside, but unless it just makes a massive break higher and puts all of this behind it, it is bucking for a pullback here. If it does break higher massively, however, we can expect a substantial reckoning in the future.

Again we are going to be looking for some downside positions but we are staying with breakdowns below support given that the indexes are not yet breaking their trends. There are a few others that have rallied higher and look weak that we are looking to play to the downside, but we want to see the market break lower as well. On current upside positions we will protect against downside breakdowns.

There are still stocks that look good upside as the creeping weakness has not become widespread. If the pullback is orderly and somewhat contained these stocks could finish up their patterns and still breakout. With many stocks already extended from great runs thus far, we are looking at each one of these potential upside buys and asking why is it just now making a move, that is, is it a laggard or are there other circumstances at play. Rotation of money is one; if investors leave say technology stocks but want to stay invested in the market, maybe they move it somewhere else. As the market has become choppier we have noticed that financial stocks are holding up well and gold stocks are starting to move higher. At that same time, many smaller caps of all types are still setting up well.

In the end we will let the stocks show us the moves before we enter. As we have said, we are very visual and want to see the move first. If the stocks give us the move, up or down, we will make the play.

Support and Resistance

Nasdaq: Closed at 1626.49
- Resistance: 1685 (recent intraday high) is a point to watch. 1700 (Feb 2002 low).
- Support: The 10 day MVA at 1619.92. 1595 (June 2002 closing high). The 18 day MVA (1595). 1573 (May 2002 closing low). The May high (1554) is what we are watching as a primary support level. The December intraday high (1522). The exponential 50 day MVA (1521) is the next primary support point. The January high (1467).

S&P 500: Closed at 988.61
- Resistance: 990 to 1000. 1007, the 6-06 intraday high. Then 1050.
- Support: The 10 day MVA (982). 975 (December 1997 peak). The 18 day MVA (970). 965 (August 2002 peak). The mid-May high (948). 935 (November and January peaks). The 50 day MVA (936).

Dow: Closed at 9117.12
- Resistance: 9216 (6-06 intraday high). 9500 (June 2002 lows).
- Support: The August high (9077) and the December high (9044) may now act as some support. The 10 day MVA (9038). The 18 day MVA (8930). January high (8870). November high (8800). May high at 8743. The 50 day MVA (8661). 8522 and 8520, the March and April twin peaks. The 200 day MVA (8342).

Economic Calendar

6-16-03
- NY PMI, June (8:00): 8.8 expected, 10.6 May.

6-17-03
- CPI, May (8:30): -0.1% expected, -0.3% April.
- Core CPI: 0.1% expected, 0.0% prior.
- Housing starts, May (8:30): 1.700M expected, 1.630M April.
- Building permits, May (8:30): 1.715M expected, 1.724M April.
- Industrial production, May (9:15): 0.1% expected, -0.5% April.
- Capacity utilization, May (9:15): 74.4% expected, 74.4% April.

6-19-03
- Current account, Q1 (8:30): -$142.0B expected, -$136.9B Q4.
- Initial jobless claims (8:30): 435K expected, 430K prior.
- Leading economic indicators, May (10:00): 0.6% expected, 0.1% April.
- Philly Fed, June (12:00): 5.0 expected, -4.8 May.
- Treasury budget, May (2:00): -$90.0B expected, -$80.6B April.