- A test of support sparks a late wave of buying. - Durables orders solid on all fronts. - Market keeps on doing what is best for it regardless of what the pros think.
Late rally keeps the consolidation just that.
The rumor mill was churning again Friday. Remember on Thursday supposedly SSB was selling S&P futures, the terror level was to be changed, airplanes strafing the presidential motorcade, etc. Friday there was supposedly a big asset swap underway. Stocks fell, bonds rallied, indicating that the swap was from stocks to bonds. Even with bonds dropping hard the past two weeks, bonds were still rich given the strong run the prior year. Thus the idea of a big move into bonds seemed to be a strange and very economically bearish move.
Indeed, once bonds got a head of steam investors sold into the rally and pushed bonds right back down. Then came the second rumor of the day, that forces were close to Saddam Hussein. That supposedly put a bid into stocks. More likely it was the test of support near the bottom of the trading range that sent stocks higher. In other words a technical move. This rumor mill is a classic symptom of a consolidating market where traders get nervous because they try to look beyond what is happening and find a reason for the fact that the market is not advancing. The rumor mill starts as some traders try to influence the action to benefit their positions whether long or short.
Aside from rumor mongering just looking at the action tells the story. Up off of support like clockwork and bouncing back into the heart of the trading range. Volume was low. Breadth was weak then turned sharply positive as the momentum swung back from the selling. Very few breakouts as stocks continue to consolidate gains and form new bases. The action bespeaks a consolidation. Fretting over it or trying to find excuses for it is SOP.
THE ECONOMY
Durable goods orders for June are very solid, up 2.1% versus the 1.0% expected. That is the highest since January, matching that month�s gain. Transportation was up 3.9%, leading the numbers higher, but even without airplanes and cars it was up still up 1.4% on top of a 0.9% May increase. The most important area is the non-defense capital spending ex aircraft, up 0.6%, again showing improvement over the 0.5% May gain. This is the area that more closely reflects what businesses are spending, and that is the key to the economic recovery.
This was another good report, but durable goods are volatile. In May transportation was down 2.1%, dragging that number lower. All during the recession transportation has been up one week and down one week. Underlying that volatility, however, is the emerging strength in the business spending. Strength may be too strong; improvement is more accurate. With the tax incentives to businesses we continue to look for improvement as the third quarter moves ahead. Consumers will be receiving their tax refunds and extra money each month from the reduced withholding, and that combination may embolden business spending even more. That is what this is all about: keeping the consumer going while enticing businesses to take the chance and spend in anticipation of economic improvement.
ECRI is soaring.
This is a private version of the leading economic indicators, but it looks at more indicators (7), is more sensitive, and has a better track record than the LEI. The past week the ECRI hit a 3 year high. The 4-week average hit a 16 year high, jumping a full point week over week. According to the managing director the �index is on fire.� It has a good track record for predicting slowdowns and increases, and with the surging index you can take a bit more comfort that many short and long term indicators are in line with the slowly improving economic reports.
New homes sales jump but the largest part of the market drops.
New home sales rose 4.7%, much better than anticipated. Existing homes sales, 80% of the market, fell 0.3% in June. These numbers prompted analysts to label the housing market as still �red hot� and claimed it bodes well for the rest of the year. No doubt those new homes still have to be furnished and that drives sales for durables down the road, but a gain in just 20% of the market does not equate to a �red hot� market. When the largest part of the market fades the impact of those new home sales is muted somewhat. Indeed the inventory for used homes hit a twelve year high.
The question that is not being answered is whether this jump in sales was the surge typically seen when those sitting on the fence and those that have waited a bit too late suddenly rush in when they see rates starting to rise and anticipate the opportunity is soon to be missed. Refinancing is slacking off as mortgage rates climb; it appears as if the refinancing heyday is behind us. As consumers can afford less housing as rates rise, the market that was already top heavy with high end sales slowing over the past year looks to get even more so. Here in Texas the market has already softened quite a bit. High end is really weak and we know of two large subdivisions that were cleared, graded and then left vacant after starting some utility work. That may not be a representative sample, but if the market was �red hot,� that would not happen. Certainly it would not have occurred two years ago.
THE MARKET
It may be boring and somewhat frustrating, but the market is doing just what it needs to do, i.e., consolidate the strong run up from March with a nice lateral move that is holding most of the gains. A good stingy market is what you want to see when the market takes a breather. Thus far the action has been much better than in January to March where the indexes gave back a hefty chunk of the gains, a very nice plus.
Even with what we see to be very constructive action for the market longer term we hear a lot of nervous and worried comments about the market. Some fixtures on the financial shows came up from the trading floors to talk about how things were very �troublesome� early in the session. Some other analysts have stated they are very concerned and need to see the large cap indexes clear their June and July highs before they will feel better.
The implication is that the market is in trouble here. It could be and perhaps we are just too stupid to see it. Still, this is the same line of talk we heard in February and March even as Nasdaq worked through a very solid pullback that formed a nice reverse head and shoulders that led to the breakout. We were pretty upbeat about that even as many bemoaned how the rally had peaked. Leading stocks continued to perform, either rallying or forming up solid bases as the indexes worked back down in an orderly fashion showing overall positive price/volume action (up on up days, down on down days).
Bears on the sidelines still hold a lot of money.
The more we hear this worry about how the market is doing even as it moves laterally and in a fairly orderly manner, the more conviction we have that things are heading in the right direction. Many claim that there are too many bulls and too few bears. As you know, we are of the opinion that there are very few bears in the market, but there are a lot of bears that used to be in the market and have not come back. The last estimates this week showed another $4B or so moved into the market. They are saying that leaves at least $2.8T on the sidelines, still in the hands of the bears formerly in the market.
That is where the fuel for further market advances is stacked. With savings accounts and money markets still earning nothing even with the two week spike in the 10 year treasury, that money is slowly dragged into stocks as the best place for returns as bonds have had a run and are reversing some of those gains. Add onto that the rising concerns we hear about the market�s health as it moves laterally and there is a continued underlying sense that the bulls are not as bullish as made out to be. There will be many that disagree with this, but talking with floor traders and investors from around the country, there is a level of fear that is still not far from the surface. If the market stops moving up, the fear does.
What we think we are seeing is some serious overanalyzing of the micro moves. Floor traders hustle upstairs for their television spot and they have to have an answer to the question �why is the market doing X today?� They then go into some story about how so and so was buying bonds and selling futures while what�s his name downgraded Widgetmaster in an attempt to explain why the Dow moved 50 points one direction or the other. This tends to make things seem a lot more complex than they are. By parsing the action on an hourly basis the big picture is lost.
In sum, the market is moving in a consolidation. The up and down action day to day is raising anxiety levels, but a market that is consolidating is one where there are sellers taking profits and some buyers picking up shares when they dip. Neither is strong enough to break the market higher or lower, but they trade shots day to day, and thus the back and forth action in the range. Price/volume action could be better, but thus far the indexes and most stocks are holding support and forming new bases. When you back away from the minutia, the market is showing the classic signs of a lateral move where gains are digested after a solid run. It is time to be patient and let that run its course.
Market Sentiment
VIX: 19.94; -0.52 VXN: 30.04; -1.41
Put/Call Ratio (CBOE): 0.67; -0.08
Nasdaq
Tapped the June intraday highs on the low and rebounded to close on its highs and right back in the heart of the trading range.
Stats: +29.28 points (+1.72%) to close at 1730.7 Volume: 1.59B (-16.64%). A typical summer Friday with volume falling well below average on the bounce. That shows a lack of any real accumulation. Price/volume action does need to improve as the index moves laterally to show accumulation has resumed. At first there is usually a lack of accumulation as the profit takers and other sellers unload shares. The accumulation starts when the selling starts to wane and buyers start slowly working into more positions.
Up Volume: 1.025B (+261M) Down Volume: 551M (-578M)
A/D and Hi/Lo: Advancers led 1.41 to 1. Big move upside but little participation as small and mid-caps lagged noticeably. Previous Session: Decliners led 1.09 to 1
New Highs: 185 (-88). New highs fell as the index posted a 1.7% gain. Another sing of a consolidation. New Lows: 10 (+3)
The Chart: (Click to view the chart)
Nasdaq is showing day to day volatility, up one session and down the next. After hitting over 1750 on the July high and gapping down seven sessions back the index has gapped the opposite direction from the close all but one day. Back and forth action as the sellers buy on the moves up and buyers buy in the tests lower. That is one reason we only buy if we see a strong breakout and not just a lower volume effort. Friday Nasdaq gapped slightly higher then fell to test the June intraday highs (1685) yet again. From there it found footing once more and rallied past 1700 and the 18 day MVA to close back in the meat of the consolidation (1677 to 1776). Volume was lower so no real accumulation, but just more good action in what is shaping up to be a trading range similar in nature to SP500 and DJ30. It has momentum to run up to 1750, but as we have seen, momentum in this consolidation is tenuous and changeable.
S&P 500/NYSE
Nice bounce off the near support at 975 as the large caps continue their 7 week lateral move.
Stats: +17.08 points (+1.74%) to close at 998.68 NYSE Volume: 1.371B (-11.05%). Back below average as the index rallied. Price/volume action the past two sessions has done some backsliding with selling on rising volume and rallying on lower volume. It is not out of hand, but as the lateral move continues it needs to again show the improvement yet again.
Up Volume: 1.052B (+406M) Down Volume: 335M (-568M)
A/D and Hi/Lo: Advancers led 1.9 to 1. Slightly negative on the morning lows, but then closed nicely as the NYSE rallied. Small and mid-caps still lagged at +0.6% and +0.8%, respectively; otherwise this would have been a very strong number. This is another indication that as with Nasdaq, one of the market leaders in the rally is taking a breather and now working on an consolidation of their own. Previous Session: Decliners led 1.07 to 1
New Highs: 143 (-31) New Lows: 16 (0)
The Chart: (Click to view the chart)
Tapped price support at 975 (50 day MVA at 974) and rebounded like clockwork. Large caps rallied well the last two hours, closing right at the Thursday intraday high where the early rally that session failed. As with Nasdaq the large caps are back in the heart of the consolidation that runs from 975 (962 at the outside) to 1015. Not much more to say about this move other than it did what it needed to do at the support level.
DJ30:
Stats: +172.06 points (+1.89%) to close at 9284.57 Volume: 1.371B (-11.05%)
Very nice action in the Dow, rallying over some of the early resistance at 9250, just shy of the 9353 June intraday high. DJ30 outperformed every other index on the session as the cyclical stocks continue to attract rotating money as the early leading techs and smaller caps have to catch their wind. As we have noted before, this rotation is a double positive. First, money is not leaving the market, it is just moving to other areas while profits are taken in the techs and smaller caps. Second, as with small caps when they were leading early, cyclical stocks are signals of economic recovery as they are expected to benefit early in an economic recovery. The Dow looks ready to make a run at the top of the range, but with lower overall volume, we don�t think it is ready for a breakout.
THIS WEEK
Earnings reports will be waning while economic reports will wax this week. Consumer confidence, Q2 GDP preliminary, Chicago PMI, personal spending, ISM, employment report. Plenty of reports to show improving conditions and the employment report to shoot holes in it. It is important to remember that employment numbers get worse even as the economy starts to recover. Buoyed by the signs of improving economic conditions more hopefuls enter the market looking for work. Jobs lag the rest of the economy and thus there are even more unemployed because more are seeking the same or slowly increasing number of jobs.
DJ30 looks as if it is trying to make a move, but the price/volume action has not really been firm enough on that index or the other indexes to indicate a breakout from the top of the range. If the economic data is blowout that could happen, but with the much ballyhooed employment report out Friday the market most likely will continue to work in the range in anticipation of those numbers.
The consolidation environment means we continue to look for those stocks that make the moves on strong volume. Otherwise we can get caught up in stocks that simply move up with the market as it moves toward the resistance in the range and then move right back down when the rest of the market hits resistance and falls back. Solid patterns with strong accumulation, good price/volume action, money flow and relative strength are making and holding good breakouts. In this consolidation even some of those will not hold up. That is why we look at many, take the best of the best, and then get in only if they make strong breakouts.
That requires patience to let the plays set up, make the move, and hold it. There are still many stocks in solid patterns that could start higher at any time. While we need to be patient and conservative in our approach while the market consolidates, we also need to keep up with the stocks in good bases that are trying to vie for the leadership. When they make their moves we will continue to venture positions and thus do our best to capture the start of the next move higher.
Support and Resistance
Nasdaq: Closed at 1730.70 - Resistance: 1760 (May 2002). 1800. - Support: 1700 (Feb 2002 low). The 18 day MVA (1703). 1685 (June intraday high) and June closing highs (1677 to 1645). The exponential 50 day MVA (1640). 1600 to 1595 (June 2002 closing high). The mid-May high (1554).
S&P 500: Closed at 998.68 - Resistance: 1003, the early June closing high. June closing high at 1011. The June intraday high at 1015. Then 1050. - Support: 975 (December 1997 peak). The 50 day MVA (974) and 965 (August 2002 peak). The mid-May high (948) and 935 (November and January peaks).
Dow: Closed at 9284.57 - Resistance: 9236, the early June intraday high to 9250is cracked. 9353, the June high. 9500 (June 2002 lows). - Support: The 18 day MVA (9138). 9000 is some psychological and price support that has held previously. The 50 day MVA (8989). 8980 is the neckline in the short head and shoulders pattern. January high (8870). The mid-May high at 8743
Economic Calendar
7-29-03 - Consumer confidence, July (10:00): 85.0 expected, 83.5 June.
7-30-03 - Fed Beige Book (2:00)
7-31-03 - Initial jobless claims (8:30): 400K expected, 386K prior. - Q2 advance GDP (8:30): 1.7% expected, 1.4% Q1. - Chicago PMI, July (10:00): 53.7 expected, 52.5 June.
8-01-03 - Personal income, June (8:30): 0.3% expected, 0.3% May. - Personal spending, June (8:30): 0.4% expected, 0.1% May. - Non-farm payrolls, July (8:30): 5K expected, -30K June. - Unemployment rate, July (8:30): 6.3% expected, 6.4% June - Hourly earnings (8:30): 0.2% expected, 0.2% June - Average workweek (8:30): 33.8 expected, 33.7 June - Michigan sentiment revised, July (9:45): 90.7 expected, 90.3 preliminary. - ISM Index, July (10:00): 51.5 expected, 49.8 June. - Construction spending, June (10:00): 0.4% expected, -1.7% May.
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