- Market rebounds to close the week, but trade is light. - Core producer prices slide yet again showing no reflation at this point. - Market poised again after another short pullback, but is it really ready? - Subscriber Questions.
Market shows its upward bias.
Thursday stocks suffered some sizeable price losses and looked ready to test even lower, but they started Friday with an upward bias and held the positive tone throughout the session. It was no great move as volume was well off pace and the large cap indexes did not clear interim resistance but stocks did repair some losses from Thursday
We would have preferred the market to test lower once more and then proceed higher. It has continued to take minor corrections as it trends higher, but a 1 to 2 day pullback does not set up the strongest of foundations, particularly after Nasdaq just ran 150 points in a week. A longer rest would be nice, but the bias definitely remains to the upside as more money flows in. This past week $2.4B moved into equity mutual funds with the 4-week average at $4.76B. With money coming in, fund managers have to put some of it to work. They are required to stay mostly invested, and if money keeps moving in they keep putting it into stocks whenever there is an opening. Recently just a day or two of a pullback has prompted buying.
There were a lot of stocks rising as upside breadth was quite solid. Not many were moving on volume, however. As always there were a few good moves on volume, but many stocks also spent the session continuing their small pullbacks from the strong run up to Wednesday. We are looking at quite a few of those for this coming week.
THE ECONOMY
The economic data last week failed to provide any fireworks. Jobless claims continuing to rise and hold well over 400K along with producer prices that continue to decline epitomized the economic week: investors wanting some indication things were better, but the economy failing to provide the desired tonic.
Energy price hikes fuel Producer Price rise.
Producer prices rose 0.5% in June. Economists have been looking for some inflation in prices as an indication that deflation is not appearing. The June rise, however, was the result of a 3.4% increase in energy prices. The core (no food or energy) fell 0.1%. The numbers showed no real change in trend. Year over year overall prices were up 2.9%. Core prices were down 0.3% year over year. There is no real deflation to speak of, but the disinflation that started in the late 1990�s continues through today, exacerbated by the recession and market crash.
There is still the chance the US could follow Japan if the monetary and fiscal stimulus proves too little, too late. While there has been talk of further fiscal stimulus from the Bush administration to be announced sometime in September (e.g., personal savings accounts), basically the powers that be are on standby, waiting to see what has been done thus far generates some uptick in business spending.
That is a risky business when, as the Fed says, you are not sure what the enemy looks like. There was some economic upturn after the 2001 tax cuts, but the lukewarm, short term cuts did not provide the stimulus of longer term, fixed cuts that business investors can make longer term plans around. A slight uptick in business investment was seen in Q3 and some of Q4 2002, but that did not last. A modest increase in activity will divert the already waning attention of policy makers away from the economy, or at least with respect to stimulating economic growth. There will be plenty ready to tear at it during the campaign to come, and it may suffer from conscious neglect to the detriment of all.
A full economic week with earnings to boot.
This week the regional manufacturing reports start up again with New York and the Philadelphia Fed reporting in. June retail sales, CPI, housing starts and the preliminary Michigan 200 will also be released. The market has done a pretty fair job of ignoring the more recent economic data in favor of improvement down the road. Indeed, that is what the entire rally has been built upon. There will need to be signs of improvement in the early fall, maybe even late summer. For now the market is looking past very mediocre economic data that fail to show any significant improvement.
THE MARKET
There are many theories about the market action right now, about how it has come too far with respect to valuations, about how it is still undervalued, about how a correction is coming, about how the best is yet to come. No more theories than usual, but after the long downtrend and the first serious rally since that time the debate is about the future is running strong.
Everyone has theories and we are no exception. The market, however, invariably makes kindling out of most theories either by proving them wrong as far as the actual outcome or as far as timing. Many bears were absolutely correct in saying the market was going to crash. The problem is some were off by almost 10 years. Heck the staunchest bulls would agree that the market was going to go through a bear market at some point. Timing, as with all things in life and business, is key.
Because the market is always on its own timetable we have to be willing to put aside our theories on what the ultimate direction or timing will be in favor of what the market is telling us here and now. That means looking at the trend, the accumulation or distribution during the trend, signs of strengthening or weakening (increased volatility, failing at resistance, bearish or bullish pattern forming), and leadership. We call these the nuts and bolts of the market because they are what the day to day market moves are built upon. Watching these gives us an idea of the market strength right here and now regardless of valuation opinions and the like.
The market is in an uptrend. It has leadership in technology, internet, biotechnology, small caps and mid-caps. The latter two are important in a recovering economy scenario as they tend to perform well when the economy is starting to recover. The semiconductors have lagged to this point, but as discussed last week they have formed a potentially bullish cup with handle pattern; if they can break out the market would receive more important leadership.
At the same time the market is extended as many leaders have made strong runs up the 10 and 18 day MVA in their uptrends following their breakouts. Some have come back to test the 50 day MVA and are ready again. Many are still working on consolidating but the market is not giving any stock much time as that new money is continually put to work. The market has shown the ability to correct intraday or over a session or two and then moves up again. Thus far that has been enough to sustain the uptrend. SP500 and DJ30 are at relatively important crossroads right now, having been unable to shake off a short term top. They can break either way at this point, but it is important to note that they have been lagging Nasdaq, the SP600, Russell 2000, and SP400 (mid-caps) for the past two months.
Those leading indexes have broken over the recent highs and are making a nice test of that move along with the leading stocks that comprise those indexes. How they respond to this pullback and how SOX manages to perform regarding a breakout will tell the tale. They look good despite the long run to this point as they continue to move in a very orderly manner when they make their pullbacks. As we said last week, at some point the market will correct this move. The longer it takes the sharper it will be, particularly if it hangs on into the late summer ahead of the traditional September and October bloodletting. The market has not, however, shown that it is ready to pullback deeper.
Market Sentiment
VIX: 20.72; -0.81 VXN: 32.8; -0.86
Put/Call Ratio (CBOE): 0.98; +0.25. Again the put/call ratio runs higher even as the market moves higher. This has been a pretty accurate indicator of short term advances in this uptrend.
Nasdaq
After a quick, sharp pullback to test the 10 day MVA Thursday, Nasdaq bounced but low volume indicated no accumulation overall though some leaders were up and running on volume yet again.
Stats: +18.07 points (+1.05%) to close at 1733.93 Volume: 1.523B (-12.87%). Significant drop in volume just as the Thursday selling volume drop was significant. No distribution Thursday but no accumulation Friday.
Up Volume: 1.005B (+710M) Down Volume: 469M (-958M)
A/D and Hi/Lo: Advancers led 1.75 to 1. Not bad but not great. Previous Session: Decliners led 1.99 to 1
New Highs: 244 (+25) New Lows: 4 (-3)
The Chart: (Click to view the chart)
Nasdaq made a quick test of some support at 1700 and the 10 day MVA (1699) Thursday and used that to bounce Friday. Volume was lower on the rebound attempt but we also note it was Friday in the summertime and that often produces lower trading volumes. Even as Nasdaq bounced many Nasdaq stocks continued nice, orderly pullbacks to near resistance. The Friday move may not have had any muscle, but the Thursday selling was at least as limp. Many stocks are in a decent position after a short pullback; they may make another test down toward the 10 day, but we see many solid leaders that are setting up for the next bounce higher. Nasdaq is extended, but with new money continually moving in, it can become more extended.
S&P 500/NYSE
Still below the recent highs and having to work hard, but it is trying a bounce off the short term MVA.
Stats: +9.44 points (+0.95%) to close at 998.14 NYSE Volume: 1.203B (+4.72%)
Up Volume: 823M (+572M) Down Volume: 361M (-827M)
A/D and Hi/Lo: Advancers led 2.18 to 1 Previous Session: Decliners led 2.43 to 1
New Highs: 176 (+53) New Lows: 1 (-6)
The Chart: (Click to view the chart)
Thursday SP500 undercut the 18 day MVA (990) but rebounded to hold that level as volume backed off significantly on the pullback. Friday volume was even lower, but even the large caps found that upward market bias and rose off of that near term support. It is definitely struggling, but it has lagged Nasdaq and the other smaller cap indexes the past two months. It is at an important stage, but if the market leadership starts back up, SP500 will continue to tag along. It tapped toward resistance on the intraday high (1000.86), but it still has 1003 and 1011 to deal with.
DJ30:
Stats: +83.55 points (+0.92%) to close at 9119.59 Volume: 1.203B (+4.72%)
The Chart: (Click to view the chart)
DJ30 and SP500 are working in lockstep, with DJ30 testing near support as well on Thursday (9000) and recovering Friday to move back over the short term MVA (9115). Weak volume and resistance still at 9250 and then 9353 (June high). It is not leading, and we are not too sure it could drag down the stronger smaller cap indexes if it failed to rally.
THIS WEEK
The economic news gets a bit more interesting this week and earnings reports really heat up. We actually believe that some of the regional manufacturing reports will continue to show improvement. The primary focus, however, will be on the earnings.
The market ran up ahead of the first earnings reports and even though AA, YHOO, GE and others reported solid results, they and the market sold on the news. Rises on anticipation, sells on reality. If earnings were truly stellar the stock was rewarded, but overall the market ran hard into earnings (150 Nasdaq points) and needed a rest. It is taking the same kind of short consolidation or pullback it has made to set up its continued run.
Stocks have pulled back to near support as of Friday with some bouncing and most setting up the next move. The market made the pullback on lower volume, and along with the continuing good action in the leadership, the nuts and bolts are still showing the uptrend is in place. If the leaders provide upside moves on good volume from these pullbacks we will look to participate and at least make some short term gains on them yet again. Come to think of it, we said that about some of the leaders back when things were getting a bit choppy, and they have made us quite a bit of money even from then. If SOX can make a breakout there could be a rush higher before a larger pullback arrives.
Support and Resistance
Nasdaq: Closed at 1733.93 - Resistance: 1760 (May 2002). 1800. - Support: 1700 (Feb 2002 low). The 10 day MVA (1699). 1685 (June intraday high). The 18 day MVA (1675). 1646, the early June high. The exponential 50 day MVA (1601). 1600 to 1595 (June 2002 closing high). The mid-May high (1554).
S&P 500: Closed at 998.14 - Resistance: 1003, the early June closing high. June closing high at 1011. The June intraday high at 1015. Then 1050. - Support: The 18 day MVA (990). 975 (December 1997 peak). The 50 day MVA (966) and 965 (August 2002 peak). The mid-May high (948) and 935 (November and January peaks).
Dow: Closed at 9119.59 - Resistance: 9236, the early June intraday high to 9250. 9352, the June high. 9500 (June 2002 lows). - Support: The 10 day MVA (9115). The 18 day MVA (9095). 9000 is some psychological and price support. 8980 is the neckline in the short head and shoulders pattern. The 50 day MVA (8909). January high (8870). The mid-May high at 8743
Economic Calendar
7-15-03 - NY Empire State PMI, July (8:00): 19.4 expected, 26.8 June. - Retail sales, June (8:30): 0.4% expected, 0.1% May. - Ex autos (8:30): 0.3% expected, 0.1% May.
7-16-03 - CPI, June (8:30): 0.2% expected, 0.0% May. - Core CPI (8:30): 0.1% expected, 0.3% May. - Business inventories, May (8:30): 0.0% expected, 0.1% April - Industrial production, June (9:15): 0.1% expected, 0.1% May. - Capacity utilization, June (9:15): 74.4% expected, 74.3% May.
Q: Can you please tell me where I can find information intraday to know if the institutions are on the selling side or buy side. You mentioned this in part 1. Thanks.
A: During any individual session there are several signals we look for to see if institutions are net buyers are sellers. The fundamental indication is whether the market overall is rising or falling on stronger volume. If volume is running stronger, then the market move has institutions behind it as they control over 70% of the money in the market. Rising prices on rising volume is accumulation; falling prices on rising volume is distribution (selling). Watching leaders and their price/volume action as well is another indication as the leaders set the pace for the rest of the market.
In addition to the primary indicator of price/volume action on the indexes and leading stocks, we also talk with floor traders and brokers for some big institutional clients. While sometimes they are coy with what is going on they typically provide some valuable and accurate information. They may not say who is buying or selling, but they will tell you if it is a large institution.
Along the same lines we check into block trades, i.e., trades of 10,000 shares ore more. Those large trades require a lot of money and typically are the footprints of the big money controlled by institutions. Gains or declines accompanied by a lot of block trades is another signal of institutional involvement. Block trades can also be used as a measure of the intensity of the trading. 25K or more block trades starts to show some heavy action.
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