Intraday Market Update
US equities have traded in a relatively narrow 9 point range since yesterday afternoon's strong close. The S&P 500 hit new weekly highs of 1,075 in early trading, backed off and chopped around in an even narrower 4 point range, and then broke to new highs around 3:00 PM EST. Throughout this week's relief rally volume has been light signaling a lack of participation. Today's volume is extremely light again and there are no signs of any significant moves prior to earnings season which begins in earnest on Monday with Alcoa and CSX reporting after the bell. However, late day trading could give us some clues about the truth of this week's rally. If there was real buying to open positions this week many traders may want to lock in some gains which could spark profit taking and a spike lower. On the other hand, if the rally was because of short covering it could create another spike higher as more shorts scramble to cover positions. I doubt there is much institutional money being put to work ahead of next week's earnings, i.e. buying to open positions (I've offered my short to mid-term view of market direction and possible scenarios below). International markets all tacked on modest gains to close out the week but China surged +2.31%.
News has been relatively light with May Wholesale Inventories being the only US economic data to speak of. Wholesale inventories increased +0.5% (m/m) which was mostly in line with estimates. But on a sour note April's +0.4% rise was revised down to a +0.2% gain. Inventories of machinery and computers increased +1.7% and +1.6%, respectively, while stockpiles of petroleum were -6.0% lower. Sales dipped -0.3% in May, led by declines in non-durable goods and farm product raw materials. This offset increases in durable goods, computers, and metals and minerals (excluding petroleum). The amount of time it would take to deplete inventories at the current sales pace, as measured by the inventory-to-sales ratio, increased from 1.13 months to 1.14 months.
In equities, Google renewed its license to operate in China. Shares of GOOG opened +3.5% higher but have fallen and are now up +1.75%. Chinese competitor Baidu (BIDU) is down -2.5% and near the lows of the day. JP Morgan defended BIDU by calling the Google development a "non event." NTP Inc. announced that it has filed a lawsuit in a US District Court against various smart phone developers, including Apple, Google, Microsoft, HTC, Motorola and LG over mobile email technology. The suit alleges that the companies are violating patents related to the wireless delivery of email to cell phones. In 2006 NTP sued and won a $600 million settlement with Research in Motion to pay for a technology license.
I did not think this relief rally would come so far so fast. So far today, volume is lighter again. There is obviously a lack of participation and I am sure it has been fueled by short covering and quant trading. Regardless of what's moving the market we have to deal it. I've been spending some time this morning trying to gain more perspective on the outlook for the market in the next several weeks to several months. Please observe the 4-hour chart of the S&P 500 below since the April highs:
At the end of the day, we are in the middle of a wide chop zone right now and I'm expecting continued violent swings in both directions, especially with earnings over the next several weeks. The fact is that we are in about a 100 point downward channel on the S&P 500 that began with the April highs and flash crash lows. The SPX could continue bouncing all the way up to 1,105 and cause little damage to a bearish outlook. I would be surprised to see it but it wouldn't cause much damage in my opinion. Today, the SPX came within 1 point of its daily 20-day SMA and has stalled. We may get a pullback from here and if there is an earnings miss next week or terrible guidance from a couple of important players we could see new lows quickly. On the other hand, if there are some earning surprises and guidance is raised we could see things catapult to the upside quickly.
The dashed red lines represent the 100 point wide downward channel that we find ourselves in. It's not a perfect channel but its clearly making lower highs and lower lows. The grey horizontal rectangles represent important congestion areas that I don't think will break until there is a catalyst, perhaps from earnings next week. There is clearly more congestion overhead than below on this chart, but this is only a chart since the April highs so there are longer term support levels below. The large ovals are my immediate price targets if there is break higher (1,090 to 1,100) or lower (1,050 to 1,040). Both of these areas could set-up bullish or bearish head and shoulders/inverse head and shoulders patterns. Either of these patterns could reverse the move towards the other side of the channel. The two upper dashed blue lines (1,105 to 1,130) represents a very important range to maintain a bearish argument. A daily close and follow though above 1,105, and especially over 1,130, and the bearish argument starts to become less valid.
Another scenario that I think could develop is that this downward 100 point channel may turn into a sideways channel for several months and possibly into 2011. If it does the channel probably becomes even wider, perhaps between 980 (bottom blue dashed line) to 1,130. If you recall, the 980 level represents August 2009 lows and October 2008 highs which are important reference points. Longer term I am firmly bearish but the unwinding of the global economy may not happen for years, or it could happen in the coming months. So until there is a global game changing event or catalyst, and I'm not talking about earnings, we have to keep things in perspective. In the short term earnings should tell us a lot about the imminent move higher or lower. Our model portfolios are firmly biased to the short side. I plan to tighten stops on these positions in the weekend updates so if we are wrong our losses will be minimized. I also plan to initiate a long trade or two so that we have a more balanced portfolio on Monday morning heading into earnings.
Core Sector List:
Overall reading: 9 sectors advancing, 7 sectors declining
Strongest Sectors: Banks, Home Construction, Gold Miners
Weakest Sectors: Oil Services, Software, Pharmaceuticals
S&P 500 - Daily and 30-minute Intraday Charts:
Dow Jones - Daily and 30-minute Intraday Charts:
NASDAQ - Daily and 30-minute Intraday Charts:
Russell 2000 - Daily and 30-minute Intraday Charts: