- Another test of near resistance and another fall to near support. - Michigan sentiment improves in final report but consumer spending still weak. - Ten year bond hits the magic number at 3.55. - Market ready to slide to the next level of support.
Same action, a test of resistance and a fall to near support.
The market spent another day of slow consolidation Friday, working on low volume in the same tight range it traded in all week. The large cap indexes tested near resistance again and then fell to near support on the close again. Nasdaq rallied over 20 points before reversing to close negative though still comfortably over near support at 1600. Volume remained low indicating no distribution (big money dumping stocks) and there were not a lot of breakdowns. It was just another quiet session of the methodical consolidation the market has exhibited the past two weeks.
Though it continues to consolidate in a very orderly manner, the action did not indicate a resumption of the upside move this coming week, at least not to start the action. It did nothing to break up the rather toppy patterns the SP500 and DJ30 have formed the past month. Indeed with Nasdaq tapping at the early June highs intraday and rolling back over, it is setting up the same pattern, just a few days behind as techs tried another rally while most other stocks are already in a consolidation phase.
As far as a pullback, this is not bad action at all. Low volume selling, leaders holding up well, modest point losses. It has all the attributes of just profit taking as some investors bank gains, some buy into positions as they dip some, and others sit on the sideline and wait. We have to admit that we took a more conservative approach this week, limiting the number of positions we entered and taking a lot of partial positions. Of course the action was slower with fewer stocks making strong moves, reflecting the overall market action. In any event, after some volatile distribution and reversal sessions in early June, the market has settled into a calmer pullback mode.
THE ECONOMY
Michigan sentiment was better than feared but lower than May. That sounds discouraging. It has to be put into the bigger picture. The final June reading was better at 89.7 than the 87.7 originally reported. That was down from the May reading at 92.1, but it is important to note that the May reading was revised sharply higher from 87.2. Thus, the revised May number and the final and even preliminary June numbers were better than the �final� May number previously reported. Thus sentiment was lower but it was better than the Michigan pollsters thought it would be.
Confusing? Sure it is. When �final� numbers can be revised you need a scorecard to keep up. The main thing to focus on in revisions: what is the trend? Are they being revised higher or lower? All over the economy we are seeing more and more instances of economic reports being revised higher. That is a positive, though a kind of backdoor way of looking at a recovery. The best evidence is strong and improving reports. When you are not at that point, however, you have to look for signs of what is happening if anything. That is where the revisions come in.
Personal income and spending lackluster, but the revisions are positive.
May incomes came in at 0.3% as expected while spending rose 0.1%, less than the 0.2% hoped for. Seems consumers are saving a bit more, a continuing sign that the effects of the recession with slowed business activity and an ever-shrinking job pool are still plaguing the consumer. The consumer won�t save the economy on its own; it could not keep it out of a recession when the business side of the equation shut down in early 2000. That is a whole other story, however.
Again, looking at revisions there is improvement. April incomes were first reported as flat, but the May revision pushed them up 0.2%. Spending was negative at -0.1%, but was revised to a 0.1% gain. Once more the revisions tilt the numbers toward economic recovery, albeit a slow one. The problem remains with respect to the business side of the economy. As the Q1 GDP report demonstrated, business spending was falling the first three months. It has to show improvement post-war, but thus far the results are sketchy at best.
Interest rates could be about to get out of hand.
After the Fed cut rates 25 basis points, the bond market took it hard. In the following 1.25 days the yield on the 10 year note (the one everyone watches now that the 30 year is no longer issued) jumped from 3.3ish to 3.55 on the Friday close. That is a huge move. Moreover, the 3.55 level is a key resistance level. If it gives way interest rates will most likely move sharply higher near term. That means the Fed, in order to keep rates low as it wants in order to keep the consumer buying, would have to substantially intervene in the long end of the curve, buying 10 year treasuries in larger quantities in order to keep those rates lower. Remember, it is the housing market that has been one of the legs of the economy. It cannot go down now before businesses have started to reinvest in the country. Rising rates on the long end of the curve would hammer the housing market.
Why would rates get out of hand? Remember, we have written over the past several months that rates want to rise. They were naturally trying to move higher even with the rate cuts (those impact the short end the most with the hope they will impact the longer end of the curve) and a lot of Fed jawboning about big rate cuts. The bond market rallied hard when Greenspan and the Fed governors talked of a bigger cut for �insurance.� When that did not happen, when words turned out to be just words, the market reacted in the opposite direction, yielding to that natural inclination to rise on the possibility of a better economic future.
The jump in less than two days was big. If bonds break over 3.55 many are viewing that as a signal that rates are going to rise rapidly. They have been artificially held lower than their natural level of equilibrium. The Fed has been trying to hold a beach ball under water. Just as if you or I lost grip on a ball we were holding under water, it would pop up to the surface. If rates continue this rapid rise of the past two sessions, the Fed will have to act rapidly. Of course behind all of this is the view from the outside. Will foreign investors keep their money here if they perceive some further instability?
It is easy to stick your head in the sand and say the Fed has everything under control. The Fed is spinning several plates on sticks, hoping it can keep them all up while waiting for help from a re-ignition of corporate investment. Thus the picture is not as upbeat as is a lot of the spin you hear on television about how strong the stimulus is in the economy. It is at high levels, but the issues facing the economy have built up over many, many years, and the last recession and bear market came on the heels of an economic boom that went bust in a hurry. It will take continued extraordinary steps to ignite enough investment and consumption to overcome the continued economic malaise.
THE MARKET
One more test of resistance could not punch stocks through to the other side. Nasdaq looked as if it wanted to lead, but it is extended still, well down from 22% above its 200 day MVA (now 16% above that level). There were several dojis on indexes (Nasdaq, SP600, SP400) while others just turned after a run at resistance and faded back to again close at near support (SP500, DJ30, OEX). The large indexes have set up short term (month long) head and shoulders patterns and are resting right on the neckline of the patterns. A break below these levels opens the door down to the mid-May highs and the 50 day MVA.
Even that is a rather mild consolidation (7% on SP500, 8% on Nasdaq, 7% on the SP600). That is a very logical support point and with this market it may be enough to entice the buyers back in. It would also roughly be the height of the head and shoulders pattern, the typical amount of the drop from that pattern. Would it cure the extreme sentiment levels? A quick drop to that level and a bounce back up would help but would not change them. Even a longer consolidation lasting several weeks would not totally wipe away the low volatility and high level of bullish sentiment. Thus a pullback would help set up the next run, but it would not cure all of the potential problems the market still faces.
Bigger picture we are looking at a pullback over the next two to three weeks, that typical slow period around the end of June and first part of July earnings season. The market is extended and needs some time to consolidate. Then it is set up for a late summer bounce into August before a steeper September to October decline that gives way to a year end rally. That is the �typical� pattern, and it appears the market is setting up for that �typical� pattern. That is, of course, if nothing else springs loose such as a interest rates racing higher and the housing market collapsing.
Market Sentiment
VIX: 21.71; -0.09 VXN: 30.93; +0.02
Put/Call Ratio (CBOE): 0.99; +0.10. Many were talking about the activity in the option market Friday as the put call ratio spiked higher. Lots of speculation that the market will fall further from here. This is a contrary indicator, and suggests that a fall is not the next step. It does not have the stellar reputation it did prior to this bear market, but it still can alert us to market shifts and short term rallies. Given the overall market look, however, we do not look for a rally right away off of this number.
Nasdaq
Tried to continue to lead the market back from this test, but it reversed from the early June high, giving back a nice gain and closing negative.
Stats: -8.75 points (-0.54%) to close at 1625.26 Volume: 1.557B (-0.59%). Lower, below average volume on the reversal so it was not a violent one-day reversal session. No dumping, just a rollover from the highs.
Up Volume: 571M (-593M) Down Volume: 965M (+578M)
A/D and Hi/Lo: Decliners led 1.19 to 1. Modest declining breadth on a modest decline. Previous Session: Advancers led 1.71 to 1
New Highs: 148 (+10) New Lows: 7 (-7)
The Chart: (Click to view the chart)
Tried to lead but reached 1653 on the high (early June closing high was 1646) and that was all it could muster. It rolled over and closed just over the 18 day MVA (1620). The lower closing high this past week sets up a pattern similar to SP500 and DJ30, that short head and shoulders that is an indication of near term topping. The neckline of the pattern is the support at 1600. A breach of that opens the door down to that mid-May high (1551) and the 50 day MVA (1558). That is what we believe the next course will be.
S&P 500/NYSE
A half-hearted attempt at the 10 day MVA gave up and turned into another drop to test near support.
Stats: +0.04 points (0%) to close at 976.22 NYSE Volume: 1.216B (-11.33%). A characteristic of this consolidation has been the lower volume pullbacks since it has started the slide. There was higher volume selling and reversals ahead of the actual pullback, but the volume has backed off since the actual pullback began.
Up Volume: 355M (-632M) Down Volume: 840M (+457M)
A/D and Hi/Lo: Decliners led 1.12 to 1. Very modest downside breadth as the index eased back. Previous Session: Advancers led 1.87 to 1
New Highs: 108 (+26) New Lows: 5 (-3)
The Chart: (Click to view the chart)
Another test of the 10 day MVA (986) lacked punch and the large caps faded back to near support at 975 on the close. This point marks the neckline in the head and shoulders pattern. The lighter volume was more orderly consolidation, but we still anticipate a move through this level and on down toward the mid-May high (946) and the 50 day MVA (954) this coming week.
DJ30:
Stats: -89.99 points (-0.99%) to close at 8989.05 Volume: 1.216B (-11.33%)
The Chart: (Click to view the chart)
Blue chip stocks also tested the 10 day MVA on the high (985), tried to make a stand, but then rolled over to close near the session low. As with SP500 this puts it right at the neckline (8980) of the month-long head and shoulders pattern. A break below that level opens the door down to 8750 and the 50 day MVA (8821) for a deeper consolidation. Unlike Nasdaq and SP500, DJ30 volume rose on the selling though it was still well below average.
THIS WEEK
A short week with the July 4 holiday Friday, but a week packed with economic data and the intrigue of the end of Q2. First, the week is just 3.5 sessions with a 1:00ET close on Thursday, July 3. That leaves very little trading action and you can be Thursday will be very slow. As for the economic news, Monday there is the Chicago PMI, another read of the manufacturing sector; NY was strong, Philly was at expectations, and now everyone wonders if Chicago will show some better numbers as well ahead of the national ISM on Tuesday. Thursday is packed with the unemployment numbers, factory orders, initial claims, and ISM services.
On top of the economic news there is the quarter end on Monday, and that will provide some of its own volatility and volume to the market that it would not have otherwise. Once Monday is over, we expect the market to settle back into the consolidation. The big question for this week will be whether there are enough participants to push the indexes below near support and start the deeper consolidation. If not, when everyone returns the following Monday should provide some more downside action ahead of earnings. This would be the opposite of recent holiday sessions since the market started trending higher, so we will have to be aware of that in the event the market does not give up the near term support next week.
We will continue to have a conservative outlook as far as taking positions, but if the plays show the buy points we will need to take advantage of what the market is giving and take it. Overall we continue to look for a deeper pullback, but the market is not indicating a severe sell off. We will still be looking for downside plays to take advantage of the down move; there is enough room on a move down to the 50 day MVA to make us some nice gains. Some of our downside positions bounced late in the week as Nasdaq tried to lead higher, but most gave indications they were ready to turn back based on the Friday action and we were willing to let them make the turn if they will as the market looks as if it is going to do the same.
There are also upside positions that have formed up well that we would like to take advantage of. The consolidation has been quite mild and orderly, and leaders are already looking to move higher. We will take advantage of those solid patterns and stocks as they make strong moves.
Support and Resistance
Nasdaq: Closed at 1625.26 - Resistance: 1646, the early June closing high acted as some resistance Friday. 1685 (June intraday high) still hangs over the index. 1700 (Feb 2002 low). - Support: The 18 day MVA (1620). 1595 (June 2002 closing high). 1573 (May 2002 closing low). The May high (1554) is what we are watching as a primary support level. The exponential 50 day MVA (1558) is the next primary support point. The December intraday high (1522). The January high (1467).
S&P 500: Closed at 976.22 - Resistance: The 18 day MVA (983). The 10 day MVA (985). 1007. Then 1050. - Support: 975 (December 1997 peak). 965 (August 2002 peak). The 50 day MVA (954) and the mid-May high (948). 935 (November and January peaks).
Dow: Closed at 8989.05 - Resistance: The 10 day MVA (9091). The 18 day MVA (9060). 9500 (June 2002 lows). - Support: 9000 is some psychological and price support; the Dow closed below that level but it is not totally broken. January high (8870). The 50 day MVA (8820) and the mid-May high at 8743 are key support points on a further test. November high (8800). 8522 and 8520, the March and April twin peaks.
Economic Calendar
6-30-03 - Chicago PMI, June (10:00): 52.0 expected, 52.2 May.
7-01-03 - Auto and truck sales, June: 5.3M expected, 5.3M May. - ISM Index, June (10:00): 50.5 expected, 49.4 May. - Construction spending, May (10:00): 0.4% expected, -0.3% April.
7-03-03 - Non-farm payrolls, June (8:30): -5K expected, -17K May - Unemployment rate, June (8:30): 6.2% expected, 6.1% prior. - Hourly earnings, June (8:30): 0.2% expected, 0.3% May. - Average workweek, June (8:30): 33.8 expected, 33.7 May. - Initial jobless claims (8:30): 415K expected, 404K prior. - ISM services, June (10:00): 55.0 expected, 54.5 May. - Factory orders, May (10:00): 0.7% expected, -2.9% April.
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