Market Internals: Stocks moved modestly lower during the latest week of trading. The Dow Jones Industrial Average ($INDU) fell during four of five trading sessions and finished the week down 130 points. Meanwhile, the Nasdaq Composite Index ($COMPQ) rose twice, fell three times, and finished the week down only fifteen points. Therefore, on the whole, the major averages continue to show relatively little weekly movement and the major averages such as the Dow and the S&P 500 Index ($SPX) remain within a two-month trading range.
The relatively small point losses in both the Dow and the Nasdaq during the latest week of trading fail to reflect the more meaningful deterioration in the technical action of the market. For one, while the Dow Jones Industrial Average dipped below support at 9,200, the S&P 500 Index finished Friday near the very lows of the week and below its 50-day moving average [MA]. In short, the major averages are beginning to find it more difficult to find support at key levels.
In addition, selling increased as the week progressed. Monday, stocks traded mixed and the ratio of advancing to declining volume on the New York Stock Exchange [NYSE] was roughly even. However, up-to-down volume was negative Tuesday and Wednesday, then three-to-two positive Thursday. Friday, however, selling pressure increased and down volume topped up volume nearly three-to-one. Meanwhile, the NYSE advance-decline ratio, which was negative Monday through Wednesday and only marginally positive Thursday, was more than two-to-one negative Friday. Finally, the NYSE New High New Low Index finished the week in negative territory (77 stocks setting new 52-week highs compared to 81 new lows) for the first time since March 31, 2003. All of this data can be taken to suggest that internals are deteriorating and that the technical action of the market has become relatively poor.
Sentiment Data: The sentiment picture is unchanged from last week’s report. It continues to urge a cautious stance towards the stock market because overall picture suggests that a relatively high level of bullish sentiment has overcome the market. From a contrarian’s perspective, such a high level of bullish sentiment are a negative for the stock market because it indicates that the majority of investors, or the “crowd,” have gathered on one side of the market. When this happens, the path of least resistance is to the other side—in this case the majority of investors are displaying relatively high levels of bullishness, and that often translates into a bearish move in the stock market in the near future. The latest numbers can be found in the table below.
The plunge in bond prices and the jump in rates continued this week and TNX is July's best performer. RSI shows it being way overbought, however, and there was also non-confirmation of the recent highs.
Disk drive stocks lead the tech sector. DDX is consolidating gains after recent uptrend. Bollinger bands getting narrow and this could be a good sector to find straddles..
Brokerage stocks shoot higher in July and the Broker index is up nearly 50% from its March lows. The group fell sharply on Friday, however, and this could be a good bet to lead a correction in the stock market going forward.
Cyclical stocks perform well during July. The performance is noteworthy because they often lead the market. CYC is also at the upper end of its trading channel and is due for some short-term weakness.
The Dow Jones Utility Average stinks up the place during the month of July. It has been in a three-week trading range, but now appears set for another move to the downside.
Natural gas run out of fuel in July and XNG is unable to find any sort of support. Look for the trend to continue because momentum indicators are pointing lower still.
Oil service stocks are the worst performers during the month of July, but appear to be strengthening in August. Look for OSX to hold trendline support (on weekly chart) and move higher from here.
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