- Oil or stocks: one has to go down. - Emerging leadership takes on a bit of a defensive look. - More evidence of demand destruction for oil and gasoline. - Existing home inventories hit a 23 year high: the last bottoming sign is not in place yet. - Divided house: Still some good stocks in great position, but the market is again bifurcated.
$135 oil and stocks don't mix.
Some pairings are classics. Bogart and Bacall. Champagne and lobster. The Lone Ranger and Tonto. Biscuits and gravy. Grant and Grace Kelly. On the other hand, some pairings in life just don't go together. Ben Affleck and J-Lo. Sea bass and an '01 cabernet. Obama and Clinton (or Clinton and Clinton for that matter). $135/bbl oil and high stock prices.
Last week the market had to deal with that uneasy mix of oil and high stock prices (at least high since coming off the March lows). To say the least they struggled, able to put up only 1 gain on the week and that was a token Thursday relief bump higher. Cannot even call it a bounce it was so puny.
Oil topped 100 in early April, starting on a new run out of a consolidation. That move put stocks in a tailspin for over a week. They recovered, however, even as oil climbed higher, looking somewhat bulletproof. Last week was brutal, however, with prices surging to $135. The entire month of May has been brutal, its just that stocks had some momentum to start the month.
This last spike, however, along with predictions by GS and others of a sustained and continued price rise, OPEC's refusal to pump more (as if it could pump enough to make a difference), and the realization that we are way, way behind the curve as a nation and planet in coming up with legitimate alternatives for our vehicle fleets, hit home with investors. It didn't help that the indices ran into key resistance just about the same time and could not hold the move through those levels. Double trouble. They failed at resistance Monday and were down the rest of the week, prompting characterizations of the market action as a failed rally.
It might be. The Dow was certainly in the toilet and after Friday SP500 is not a picture you would keep in your wallet. $135 oil may indeed finally be the choke point, the point where a frustrated consumer, similar to Roberto Duran in the re-match with Sugar Ray Leonard, says 'no mas.' Stocks definitely reacted negatively, energy and commodities included.
As noted above, stocks did the same thing in April when oil jumped out of a consolidation. Stocks fell back rather sharply as oil gained strength and hit new highs. They undercut the 50 day EMA but found support and rallied back. Indeed, the losses in the indices as of Friday are equal to those in April (500 points on DJ30, 66 on SP500, and 120 on NASDAQ after a 128 point dip in April). Thus looking at the patterns of runs and tests in this rally, you cannot say the indices have broken apart and are in freefall. Many are saying that, and the action last week was not great (some distribution, some weakness in leadership), but there is continuing strength in NASDAQ 100, small and mid-caps, etc. Thus there are a lot of the same attributes of an earlier test that rebounded, but there are also issues such as oil at $135/bbl, a new all-time high. That begs the question, yes the pullback is the same as others, but oil is not a lot higher and we are seeing signs of consumers gagging on it.
There is no question stocks and oil cannot rise together indefinitely. As with the consumer of gasoline, if investors feel a spike will not last long but has to fall, stocks can hold position or even rally in anticipation of falling prices. Last week the idea that oil is not coming back down anytime soon soaked in and that undermined stock prices. Indeed, oil held up last week even in the face of more demand destruction as discussed this past week and more below.
TECHNICAL. The intraday action was low to lower, but then a recovery on NASDAQ and to a lesser extent (much less) on SP500 and DJ30. Good comeback on the smaller caps and NASDAQ 100, but it was not a great recovery.
INTERNALS: Volume was weaker ahead of the long weekend, so no distribution this session, just no buyers and a few sellers intent on squaring up ahead of the holiday. Breadth was weak at -2.6:1 NYSE, -2.2:1 NASDAQ. It was a week that saw some distribution creep back into the market.
CHARTS: DJ30 was buried last week, falling from the 200 day SMA as if that level electrocuted it. It is hanging on in no-man's land. SP500 was no beauty, falling to its 50 day SMA Friday. Outside of those, however, the indices were not bad: NASDAQ, SP400, NASDAQ 100 all held the line admirably. Took on some water late in the week but managed hold up decently.
LEADERSHIP: All areas came under pressure last week, leader or not. Energy stocks, metals, and industrial stocks were down. Some broke down, but the vast majority held support and are thus still in decent technical position to move higher. They will definitely have to step up and lead just as they did after their stumble in early April and the recovery off of that test. It is interesting that we see some defensive action percolating in the leaders as some healthcare stocks are setting up to move higher. That puts the recent leaders and their ability to move higher near term in even a bit more question.
THE ECONOMY
All week we discussed reasons why there are cracks in the 'oil cannot lose' trade. Rules changes on the commodities and energy exchanges now limit leverage across the exchanges versus the old way of allowing full leverage on each exchange. US gasoline demand fell. Friday there was more news. March vehicle miles driven fell 4%. That was well before oil started this last sharp spike higher. Thus you can anticipate further declines in miles driven in April and May. Friday also saw changes announced in other countries regarding gasoline subsidies. India and Indonesia are removing them and that means their citizens will have to pay up for gasoline and we will see demand shrivel in those countries, or at least pullback from the shock. Thus we will see some demand destruction outside of the US as well.
Existing home sales decline slows, but inventories show no sign of bottoming.
April existing home sales fell 1% in April, and that was a bit better than expected. Hurrah. It also showed that the pace of declines is slowing. Over the past six months sales are down 3.4%. The five months prior to that period saw a 17.2% decline. The sales decline is definitely slowing. That is part of the process: the sharp decline in sales ahs to slow and it is doing so.
Another sign of bottoming? Might be but for the other aspects of the report such as inventories. Sales declines have to slow, but that is an initial step. They have to improve to start getting rid of inventory.
Speaking of inventory, it jumped again, this time to a 23 year high at 11.2 months. After the sales declines level off you see inventories begin to decline thus the bottoming process continues, but you won't see the market really turn until the glut of houses gets put to bed.
THE MARKET
MARKET SENTIMENT
VIX moved down to the October levels when the market topped and the initial response has been a market selloff, particularly on DJ30. The trick now is how the other indices hold on this test.
This is also a test of the credit facilities the Fed has incorporated and if they can hold sway with spiking oil prices. The Fed entered the game with its credit facilities that actually work, the correlation with VIX that set up during the correction is broken. Volatility and hence VIX can decline and hold at low levels for a very long time and have no bearing on any continued rally.
Put/Call Ratio (CBOE): 1.05; +0.07. Three sessions above 1.0 last week as anxiety rises.
Bulls versus Bears:
This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.
Bulls: 47.3% versus 46.0% the prior week. Continuing the rise, up from 44.4%, slowing a bit as the week prior they jumped from 40.9%. The rally is having its impact, pushing bulls higher, up from 39.1% and 37.8% where it held for a few weeks. Fell to 30.9% in mid-March as the low. The indicator did its job with the dive below 35% and the crossover with the bears. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.
Bears: 30.8% versus 29.9% the prior week. Back up as not everyone believes in the rally as it butts against next resistance. Good, glad to see it. That makes two of the last three weeks to the upside for bears. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. That was a surge from an already high 36.6% the prior week. Up sharply from a low of 19.6% on the last rally. It is over 30% and indeed over 35% the prior week, meaning it has blown past the range that means business. Big move after falling to a low of 19.6% on this round. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.
NASDAQ
Stats: -19.91 points (-0.81%) to close at 2444.67 Volume: 1.728B (-11.65%)
Up Volume: 434.331M (-861.106M) Down Volume: 1.26B (+623.586M)
A/D and Hi/Lo: Decliners led 2.2 to 1. Definitely a large cap tech session as the large caps were down just 0.3%. Previous Session: Advancers led 1.53 to 1
New Highs: 43 (-8) New Lows: 125 (+10)
NASDAQ CHART: Click to view the chart
NASDAQ's pullback still looks quite normal for a test as it tapped toward the 50 day EMA on the Friday low and then rebounded some for a modest loss on lighter trade. It was certainly lower for the week but outside of Wednesday, it was not gutted or anything similar. A hold a the 50 day EMA keeps it in its uptrend from the March low, and a hold there would be even better than what it managed in the April pullback.
NASDAQ 100 (-0.30%) undercut the 200 day SMA intraday but then recovered to hold it at the close. That is what it had to do, but now it needs to bounce and move through 2000 to improve its pattern from the two-thirds of a short head and shoulders pattern it has formed this month.
NASDAQ 100 CHART: Click to view the chart
SOX CHART: Click to view the chart
SP500/NYSE
Stats: -18.42 points (-1.32%) to close at 1375.93 NYSE Volume: 1.106B (-8.43%). Volume was lower most of the week on the selling with the Wednesday losses the only ones on significant volume. Nonetheless the large caps had a hard time on the week.
Up Volume: 179.488M (-479.37M) Down Volume: 921.215M (+383.554M)
A/D and Hi/Lo: Decliners led 2.67 to 1 Previous Session: Advancers led 1.24 to 1
New Highs: 22 (-18) New Lows: 87 (+20)
SP500 CHART: Click to view the chart
After the modest upside bounce Thursday, the large caps flopped again, undercutting the 50 day EMA and closing right at the 50 day SMA. Failed to hold a break above the 200 day SMA on Monday, then selling below 1400 and the 50 day EMA. Lots of negatives for the financial stations to talk about, and indeed the large caps have dug something of a hole here. They are also right at the same point loss level as in April, and they are also still above the 50 day SMA, something they could not hold in April when things looked as dire. This is definitely the point where it has to hold and produce a new upside move to keep the rally alive, and the burden is definitely on the bulls to produce something here. The blue line in the chart is the USO (US oil fund tracking ETF).
SP600 (-1.10%) took a licking along with SP400 (-1.19%). The small caps acted similarly to NASDAQ, tapping at the 50 day EMA on the low and rebounding Friday to cut some losses. Still in good shape to make a higher low and try that 200 day SMA again. The moves in the smaller caps are lower but there is not the breakdown as seen in large cap NYSE. That still holds out some positives for the market as a whole even though it is somewhat split right now.
SP600 Chart: Click to view the chart
SP400 CHART: Click to view the chart
DJ30
Still struggling mightily as the blue chips move even lower, now breaking the 90 day SMA on the close. That puts the Dow right at the 12,500 support level, one of the stop-offs before 12,250, the next level that is itself just an interim support point. Despite the support breaking performance, DJ30 is down just the number of points here as it was in April during that selloff. That means it needs to find a bottom right in this area, and the momentum to end the week and indeed all last week doesn't suggest it has done that.
Stats: -145.99 points (-1.16%) to close at 12479.63 Volume: 190M shares Friday versus 216M shares Thursday. Volume spiked Tuesday and Wednesday to get the selling started, and the momentum rode it lower afterwards.
DJ30 CHART: Click to view the chart
TUESDAY
A down week for sure but the extent of the declines varied in depth and intensity. Friday even the mid-caps took some licks, but they were in good shape to start with so the finish was not bad. Indeed NASDAQ, NASDAQ 100, and SP600 all have the look of a rather normal pullback. If not for DJ30 in particular and SP500 to a lesser extent, it would appear the market was just pausing before resuming a run higher.
Thus the market is showing another bifurcation, something it has not shown since this rally really took hold and more than just energy and commodities stocks moved higher. Last week the market stumbled, just as it did in April and in March, when the commodities stocks struggled. This time there were no transports to the rescue, and thus the overall market sold back.
The smaller caps and techs still have those decent, orderly pullbacks, and as they tend to be more economically sensitive the action leaves you wondering a bit as to what drove the selling. If oil had come too far and materially damaged the economy then these stocks should not be showing the relative outperformance they are. Maybe it is just a case of commodities and energy getting overheated like a pair of teenagers in dad's car, and after this pullback they will resume the move and pull the other half of the market up with it.
The big issue still revolves around what oil does at this level. There is demand impact going back into March, and you can extrapolate into May given those surging prices. As noted above, if oil remains at these higher levels stocks are going to find it hard to hold, meaning even NASDAQ and the small and mid-caps will follow the larger cap NYSE stocks lower. If prices doe fall that suggests the economy will slow due to slackening demand, and that would also seem to indicate these smaller cap and growth indices would struggle. That tends to be incongruent with what their action suggests, so how they perform this week in light of the weakness in NYSE large caps is the key . . . along with what oil prices do.
The action last week definitely raised the pessimism level just as it did in early April when the rally was proclaimed dead because SP500 rallied up to 1400 but failed to break through. Since then it rallied to the 200 day SMA and failed, selling back the same amount as in April on the Friday close. There are some different elements this time, e.g. higher oil, but with many stocks still exhibiting good patterns it is hard to make a blanket write-off of the market. It doesn't look good given the way the large cap NYSE indices fell, but again there is underlying strength still in the smaller caps and the NASDAQ growth stocks.
Thus we are looking at some upside plays in good position to move higher. The market is due a relief bounce soon if nothing more. If it is just a low volume relief move we use it to close out more positions. If these good patterns break higher on volume then we take advantage of it, looking for another leg upside. That seems improbable now with the negative sentiment and the break lower in DJ30 and to a lesser extent SP500, but it also seemed improbable in April to most pundits.
Nonetheless, the burden is clearly on the NASDAQ and smaller cap indices to make the move higher and that means it simply pays be patient and let the plays come to us instead of chasing them. We could have bought more positions last week but with the 'oil crisis' as CNBC termed it along with the struggles on the Dow and SP500, it wasn't worth the associated risk ahead of the weekend. Thus we will be ready to act, but in no hurry to act; we just wan tot see good moves in order to take some more positions a bit at a time as the market tries to recover from last week's declines, particularly in the Dow and SP500.
Support and Resistance
NASDAQ: Closed at 2444.67 Resistance: The 18 day EMA at 2464 The 10 day EMA at 2474 2500 from interim August lows. The 200 day SMA at 2515 2540 from November 2007 low 2576 represents a range of interim peaks and troughs from May 2007 into December 2007. At least 8 in that period. 2618 from a June 2207 peak. 2624 is an old trendline from summer 2004/summer 2005 2668 to 2673 from November/December 2007 interim peaks 2720 (July 2007 peak), 2724 (December 2007 peak) are key resistance points
Support: 2451 is the August closing low 2419 is the January 2008 peak and the early February peak March 2008 trendline at 2424 The 50 day EMA at 2417 2392 is the April 2008 peak 2386 is the August intraday low 2378 is the mid-February peak; 2379 from the October 2006 peak 2370 from the April 2006 peak The 90 day SMA at 2352 2340 from the March 2007 low 2315 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
S&P 500: Closed at 1375.93 Resistance: The 50 day EMA at 1384 1387 is the April 2008 intraday high 1396 is the February 2008 peak The 18 day EMA at 1399 The 10 day EMA at 1406 1406 is the August and November 2007 closing low The 200 day SMA at 1426 1430 is a longer term trendline from the August 2003/September 2004 lows 1433 from a pair of August 2007 lows and December mid-month intraday low 1446 from the December low 1460 is the February 2007 peak 1481 represents several peaks and lows ranging from April 2007
Support: 1370 is the August 2007 intraday low 1374 is the March 2007 closing low The 90 day SMA at 1359 1338 is an ancient trendline
Dow: Closed at 12,479.63 Resistance: The 90 day SMA at 12,498 12,518 is the August intraday low 12,573 is the mid-February high The 50 day EMA at 12,702 12,743 is the November low 12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007 The 18 day EMA at 12,784 12,786 is the February 2007 peak 12,845 is the August closing low The 200 day SMA at 12,996 13,092 is the December 2007 intraday low 13,133 is the May 2008 high 13,250 from price points in second half of 2007 13,563 is the late December peak 13,780 is the early December 2007 peak
Support: 12,250 from late March 2007 lows 12,070 from the early February 2008 lows 12,050 from the March 2007 11,731 is the March 2008 low 11,670 is the May 2006 intraday high; 11,642 closing 11,634 is the January intraday low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
May 27 - Consumer Confidence, May (10:00): 61.0 expected, 62.3 prior - New home sales, April (10:00): 520K expected, 526K prior
May 28 - Durable goods orders, April (8:30): -0.7% expected, -0.3% prior
Market Data 
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