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InvestmentHouse Weekend Update:

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

- Oversold bounce helped along by GE earnings.
- Wholesale inventories rise, adding to debate about slowing economy even as GE sees happy days.
- Indexes split above and below support as techs breakdown while consumer, medical and industrial stocks hanging onto key levels.
- Early summer rally is over and now stocks have to finish the selling and regroup.
- Subscriber Questions.

Low volume rebound accomplishes little.

Some further selling would have done the market good, taking SP500 down for a full test of its 200 day SMA in a steady barrage of selling. That could have set up a decent relief bounce from the selling. As it turned out Friday, what seemed to be out of place optimism by GE managed to spark a modest rebound on the heels of a week of selling brought on by fears of a weaker economy, earnings warnings, and disappointing earnings results and guidance.

The rebound was modest. Volumes were sharply lower and half of the gains were given away. All the market could manage on the heels of the GE and SAP earnings was a timid rebound, hardly a counter to the previous two weeks of selling. NASDAQ and SP500, both below their 50 day SMA, barely challenged them Friday. A gap higher, a modest run early to get within view of the resistance, then backing off to mid-range for the session. Again, not much of a rebound and certainly not on the level of the higher volume selling sessions leading up to the bounce.

What Friday did was relieve some of the selling pressure that had built up as the indexes gave up the early summer rally. Thursday we said a further sell off would set up a better rebound. Instead, GE�s earnings forestalled further selling and took some of the heat off. Indeed if you listened to CNBC, Bloomberg or other financial stations you would have thought the day was a solid return to accumulation. The price/volume action, leadership stocks, and the weak action below resistance by NASDAQ and SP500 sum up a fairly lackluster upside session, particularly when juxtaposed with the recent selling. It will take a lot more for NASDAQ to set back up and ready itself for a rebound, but SP500, DJ30 and SP600 are still above their 200 day SMA. Another test of those levels and a more substantial bounce is next.

THE ECONOMY

GE tops revenue expectations by a billion, sees the �best economy in years.�

Happy days are here again. GE posted strong results and guided higher for the current quarter, gushing it was the best economy the company had seen in years. Its results certainly indicate such, and GE is in just about every business there is. You can�t get a better economic indicator. While software companies notoriously receive earnings late in the quarter and the failure to book them can kill the quarter as we have just witnessed. GE is a much broader measure of the economy with 9 of its 11 business units posting gains.

Thus GE is a better snapshot of the economy: even though things slowed in the last part of June, the economy still remains on a steady growth path. In the short term the market has overstated the slowdown, moving from full speed ahead to imminent stagnation. No expansion is straight line. The expansion surged at a blistering pace, slowed some in Q1 and Q2, but as we have stated, it will pick up late in Q3 and into Q4 as businesses rush to take advantage of the final chance at $100K expensing and bonus depreciation. Thus we are in a slower cycle in a continuing upside economic move.

Wholesale inventories jump, but what is the cause?

May inventories climbed 1.2% (0.5% expected) and April inventories were revised up to 0.2% from 0.1%. With the recent spate of weaker economic data, this had the financial station pundits sputtering about slower buying leading to rising inventories. Backpedal a month and this inventory rise would have been interpreted as inventory building, something craved by economists ever since the recession. Indeed, there has never really been a lot of inventory building during the expansion. Companies have kept inventories lean relative to the rate of growth. This is one of the larger inventory gains, and because it came after two weeks of softening economic data it is interpreted as a slowing economy.

Sales did ease, posting a 0.5% gain versus 0.9% in April. That decline along with the rise in inventories moved the stock to sales ratio up for a change (1.13 months versus 1.12 months in April). Was it lack of sales? We don�t believe so. As we reported early in the year, manufacturers were starting to stockpile raw materials needed to produce their goods, particularly lumber and metals. With prices rising and supplies getting squeezed they wanted to be sure they had the stock on hand and at a relatively reasonable price. Thus there has been inventory building at the wholesale level to hedge against these problems. Indeed, it was durable goods (lumber, metals, hardware) that produced the gain, rising 1.5%, the highest gain since another 1.5% gain in November 1999. In 1999 the build was in fact based on a slowdown as the economic cycle was peaking.

THE MARKET

Technology continued to suffer with weak bounces by NASDAQ, NASDAQ 100 and SOX that could not recover the 200 day SMA. SOX is nowhere close to that. Indeed, it is setting up a very negative pattern with all of the moving averages lining up one on top of the other, 200 day MA on top, then the 50 day, the 18 day, and the 10 day. SP500 is still above its 200 day SMA, fairing a bit better with its medical stocks, but still unable to recover its 50 day SMA. These are facing a lot of overhead supply and resistance, and have been under distribution the past week as they broke below support on rising trade. NASDAQ still has a lot of work ahead of it before it can recover and set up the foundation for another move higher.

On the other side of the fence is DJ30, DJ20 (transports), and smaller cap indexes. Those are still holding over their 200 day SMA (the latter easily), and that technically leaves them in a decent position to stage a rebound. The 50 day MA is a key institutional support level as institutions will use this level to buy into stocks they want if they are still inclined to accumulate shares. The 200 day MA is a level of last support. Institutions have already failed to support stocks at the 50 day; they are not in a more aggressive accumulation mode. If they don�t step in at the 200 day MA stocks are really in trouble. Breaches of the 200 day SMA typically lead to further selling as the big money is not interested in supporting stocks. As seen last week on NASDAQ, when volume rises on the breach, not only are institutions not supporting stocks, they are actively selling them.

At a minimum this leaves the market in a continuing base that started early in the year. The recent breakdown in NASDAQ necessitates some rebuilding before it can complete its base. We can get a jump off the 200 day SMA by SP500, DJ30 and the Russell 2000 (small caps), but they too have work to do on their bases after selling back on rising volume the past week as well.

Market Sentiment

VIX: 15.78; -0.42
VXN: 22.35; -0.33
VXO: 15.49; -0.56

Put/Call Ratio (CBOE): 0.75; -0.16. The bounce pushed the put/call ratio lower. While still in the high end of the range, it has not shown the steady purchase of excess puts, i.e., a ratio of 1.0 or better on the close. One such close last week, but with the CBOE, it typically takes 3 or so such sessions. The bounce Friday took some of the pressure off the downside speculation.

NASDAQ

Modest rebound on low volume, tapping toward the 50 day SMA but backing off again, unable to break the resistance.

Stats: +11.01 points (+0.57%) to close at 1946.33
Volume: 1.398B (-24%). Big drop in volume as techs tried to recover. Distribution resurfaced last week as the index broke down, and the buying was light as it attempted a recovery. Classic relief bounce action after a high volume sell off.

Up Volume: 971M (+635M)
Down Volume: 388M (-1.052B)

A/D and Hi/Lo: Advancers led 1.37 to 1. Very modest upside gains considering the nasty downside breadth preceding the move.
Previous Session: Decliners led 3.32 to 1

New Highs: 52 (+7)
New Lows: 121 (-10)

The Chart: (Click to view the chart)

Another wave at the 50 day SMA (1966) on the intraday high and then falling back once more. Unlike Thursday it did not completely roll over on rising volume. It held half its gain on the session, but that was about it. Low volume, modest breadth, inability to hold its gains. A decent bounce but no recovery. Still in deep water, below the 200 day SMA (1983) and the 2004 down trendline for starters. A lot of damage was done last week. NASDAQ may still be ready to try another bounce toward the 200 day SMA in another oversold bounce continuation, but that would most likely only set up another downside test.

NASDAQ 100 closed below its 200 day SMA, showing a doji as well. It too could attempt another rebound toward the 200 day, setting up further selling as well. QQQ is showing signs of attempting a bounce back from the selling, and that would entail a test of the break below the 200 day.

SOX rebounded to 451, right at near resistance. It is still buried below its 200 day SMA (488) and has major overhead resistance. Many beaten down stocks, e.g., NVLS, KLAC, started bouncing Friday, not unusual after the butt kicking they have had this month. A move to 465 looks about right.

S&P 500/NYSE

Modest rebound on below average volume, holding easily over the 200 day SMA as it tries to set up a bounce toward 1120ish.

Stats: +3.7 points (+0.33%) to close at 1112.81
NYSE Volume: 1.187B (-15.14%). Volume dropped well below average as the large caps managed their own small bounce. The bounce hardly erases the prior distribution that pushed it below its 50 day MA.

Up Volume: 735M (+442M)
Down Volume: 436M (-663M)

A/D and Hi/Lo: Advancers led 1.72 to 1
Previous Session: Decliners led 1.9 to 1

New Highs: 116 (-40)
New Lows: 144 (+3)

The Chart: (Click to view the chart)

Held over some old support at 1106 and bounced on low volume. The 50 day SMA (1118) was not even tested on the high (1115.57). After distributing 3 of the past 5 sessions the large caps are attempting to put together a bounce back in relief toward the 50 day EMA (1123). Given the same distribution, however, a test of the 200 day SMA (1101) is still ahead. As noted last week, this pattern was not bad, and indeed was one of the better index patterns in the market. It was unable to make the breakout move when it was there, and it broke down from the pattern. Not a complete breakdown overall, however, as it is still above the 200 day SMA.

The SP600 (small caps) rebounded to the 50 day EMA, moving over that level intraday but then backing off by the close. They too suffered some heavy selling last week, but as they started from a new high, they are still in decent shape.

DJ30

Gapped below the 200 day SMA (10,182) but then fought back once more. Once again it was stalled by the 50 day SMA (10,233), tapping that level on the session high. It is still being pinched between the 200 day on the bottom and the 50 day EMA (10,292) and the 2004 downtrend (10,285) from above. Critical level for the blue chips. GE reported strong earnings but could muster just a fractional gain. If they fail here, 10,000 to 9900 is easy. Looks as if it will try a move up toward 10,300 before heading lower again.

Stats: +41.66 points (+0.41%) to close at 10213.22
Volume: 161 million shares Friday versus 181 million shares Thursday.

The Chart: (Click to view the chart)

THIS WEEK

Some key indexes have dug themselves into serious holes while others are playing with the same shovels. An attempt to climb out Friday was weak at best. Some are saying that after earnings or when they are mostly over stocks will start to rally. Possibly. If the actual earnings trump the warnings and the earnings to date and provide strong guidance that could offset the current worries about a so-so economy ahead leading to lower earnings growth. Some big earnings reports from big names could help pull that off, but for now some solid earnings from GE and SAP, two big companies, could not spark anything serious. It is still too early for that as thousands of reports have yet to hit the wire.

While there is some plausibility to that view, and while we are still expecting more of a relief bounce, if it carries past key resistance ahead we will be surprised. While some were waiting for a summer rally, we think it has already come and gone and that stocks will struggle through to the end of summer. It will rally and stall, banging around in a range that continues to trend lower. SP500 still has to test its 200 day SMA, and after a continuation of the Friday relief bounce we feel it will make that test.

That does not mean there won�t be opportunity, it is just going to be within a range. A continued relief bounce will set up some more downside plays, something we wanted to see Friday, but when stocks gave back half their move, the set up was not as sweet. Again, another relief move and there will be more ready for entry.

There are still stocks and sectors holding up quite well, e.g., medical, energy, consumer, as money rotates out of technology. The economy is still expanding and consumers are confident and spending, and that continues to drive these stocks. We have been weeding positions, focusing on those that are holding up versus the market. Leadership is eroding with more quality stocks cracking support in what were decent pullbacks to test prior moves higher. At the same time there are some outstanding stocks that are looking, well, outstanding. They continue to ignore the market, making their own wake. Obviously we are focusing on those as our upside plays. Leaders are one of the top indicators for the overall market. Combined with the distribution and breakdowns by NASDAQ and SOX along with SP500�s struggle, the market is going to have to regroup, base some more, then try another move down the road.

Again, a further rebound will most likely occur and that will then set up some more downside plays. As always we will watch what the market actually does; if volume surges on the upside when JNPR or some other horse announces huge earnings and strong guidance, the story changes. Right now the market is not forecasting that scenario, but we have seen a big name turn the market�s fortunes. With all of the overhead it would have to be a hell of a report.

Support and Resistance

NASDAQ: Closed at 1946.33
Resistance:
The 50 day SMA at 1966.
The 200 day SMA at 1983.
The 2004 down trendline at 1980.
The 50 day EMA at 1984.
2024 is the June high.
2050 represents some prior price points and has stopped NASDAQ the last three times it has tried that level.

Support:
1925 is some support.
1900 to 1890.
The April lows (1880, 1878).

S&P 500: Closed at 1112.81
Resistance:
The 50 day SMA at 1117.
The 50 day EMA at 1124.
1125 was key price support.
The March/April down trendline at 1127
1142-1146 are the June highs.
The April and January highs (1150 to 1155).
Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.

Support:
1106 is a May 2002 top and represents some early 2001 lows.
The 200 day SMA (1101).
1096 to 1100.
1090 is the March low.

Dow: Closed at 10,213.22
Resistance:
The 50 day SMA at 10,233.
The January/April down trendline at 10,290
The 50 day EMA (10,292).
Late April peaks at 10,478 to 10,512
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high

Support:
The 200 day SMA at 10,182
March low at 10,007.
9900-9850.

Economic Calendar

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

July 13
- Trade Balance, May (8:30): -$48.3B expected and -$48.3B prior
- Treasury Budget, Jun (2:00): $16.3B expected and $21.2B prior

July 14
- Export Prices ex-ag., June (8:30): 0.2% prior
- Import Prices ex-oil, June (8:30): 0.4% prior
- Retail Sales, June (8:30): -0.7% expected and 1.2% prior
- Retail Sales ex-auto, June (8:30): 0.3% expected and 0.7% prior

July 15
- Business Inventories, May (8:30): 0.5% expected and 0.5% prior
- PPI, June (8:30): 0.2% expected and 0.8% prior
- Core PPI, June (8:30): 0.2% expected and 0.3% prior
- NY Empire State Index, July (8:30): 28.0 expected and 30.2 prior
- Initial Jobless Claims, 07/09 (8:30): 333K expected and 310K prior
- Industrial Production, June (9:15): 0.1% expected and 1.1% prior
- Capacity Utilization, June (9:15): 77.7% expected and 77.8% prior
- Philadelphia Fed, July (12:00): 25.0 expected and 28.9 prior

July 16
- CPI, June (8:30): 0.2% expected and 0.6% prior
- Core CPI, June (8:30): 0.2% expected and 0.2% prior
- Michigan Sentiment-Prelim., July (9:45): 97.0 expected and 95.6 prior

SUBSCRIBER QUESTIONS

Q: Could you please give me a clue as to what an "ascending or descending triangle" refers to?

A: An ascending triangle forms when prices, in tracing their daily or monthly pattern, move up and down between support and resistance to form a "shape" that looks like a triangle or a pie wedge. The point or tip of this shape is on the right side of the pattern, as prices become compressed between support and resistance. Resistance is the high prices the stock cannot yet break through (forming a horizontal "ceiling"), and support is an up trendline that develops as the low prices --on the pattern dips-- move higher and higher. This is what gives the pattern its triangle shape with the point or tip at the right side. Prices become compressed in this part of the pattern.

The stock traces this pattern as it hits a high and moves back down, finding support and bouncing back up again to that previous high. Typically it will move back down again, finding the support once more, then bouncing back up to hit the ceiling of resistance. This is the resistance the stock has to break through, and one of the reasons we like this pattern so much is because breakouts from such patterns can be strong. The pattern gets squeezed into the tip of the triangle and upon breakout can explode upward. Interestingly, there is an opposite pattern called a descending triangle, which can result in the same kind of move downward. We like to play those, too.

You can look at a chart of TRBS in April through June 2004 and see a triangle form with the lows moving up the 50 day EMA with a constant top near 44. The stock make a strong volume breakout as the pattern pinched off.

Our stock seminars go into more detail about this and other technical patterns. Check them out if you are interested. The new, updated version will be out at the end of summer!