For the market, the whole of last week felt like being in line behind a coupon queen at the grocery store. We thought the market would feel the pressure to the downside and yes, we were right but holding puts for that inevitability wasn't as profitable as it is when there is volatility associated with the drop. It was a slow week, volume was light and the outdoor weather seemed like a much better option to enjoy rather than monitoring the market. "Move already!" she exclaimed from her chair.
Friday's volume was the lightest of the year but offered the most range for trading of the week. The closing values for all three indices were well contained each day. The Dow range was just 114 points, the Nasdaq's was 91 and the S&P 500 range was just 18 points. For the week the Dow was down 1%, the S&P was down just under 2% and the Nasdaq gave up just a little under 4% from the close of the week prior.
All eyes are on the Fed now. Greenspan and friends meet Tuesday to determine the fate of short-term interest rates. The question is how much, not "if" they will cut but a forward looking market has already priced in another 50 bp decrease. The upcoming decision will be the fifth rate cut since the Fed began easing in January to stimulate a sluggish economy. There is an extraordinary amount of uncertainty regarding corporate growth prospects, the U.S. economy, and global economic conditions and relationships.
News items for yesterday included the release of the Producer's Price Index report (PPI), the Michigan Consumer Sentiment report and the Retail Sales report. The PPI rose 0.3% over last month's value, suggesting that U.S. inflation is tame at the wholesale level. As I mentioned earlier this week, the Consumer's Price Index report will be released on Wednesday. The Consumer Sentiment report received a nice bounce to signal that people are feeling a little better about things on the home front now that the stock market is rebounding. It leaves little doubt in my mind that the market has in fact become "the economy" for a whole lot of people.
The Retail Sales report offered the most interesting insights for the day. Retail sales rebounded sharply 0.8% in April led by autos and building materials. Department stores regained much of the decline suffered in February and March. This data smacks of spring fever to me though consumers aren't shopping in furniture stores. The furniture sales component has declined four of the last five months. "Eating and drinking places" suffered a bit of negativity too, down 0.8%. In my town, our Heilig-Meyers furniture store is going out of business and the new Schlotsky's is struggling to keep the doors open. Come to think of it, I own a little ice cream and grill restaurant. I assure you, the restaurant business is not a road to riches. Very tough business to hold your head above the water much less make a buck.
It was the Retail Sales report that caught the blame for Friday's market decline. If the consumer is happy and spending, then the Fed might not cut rates as aggressively. This is the quintessential headache for market participants. The sentiment for the reactions to news changes with the wind. We're back to good news is bad news now, which is in line with bad news is good news. For awhile there it was any news was good news because the market wanted to rally but now that we're getting closer to the FOMC meeting, anything that can sway the Fed is evaluated for its impact on the size of another rate cut. Did you get that?
Economists and corporate CEO's are still haggling over the prospect of whether or not there will be a second half recovery. Those in the "yes it will" camp have already put their money on the table to affirm their beliefs. That is the bounce the market has enjoyed over the past six weeks. Now the naysayers are causing enough doubt to put a lid on the buying. The result is a week like that of the one just past, a bit of a tug of war between buying and selling pressure.
The weekly charts for the major indices show what are essentially "inside" candles. Pressure builds and volatility shrinks through these struggles. When a breakout occurs from here, that's the direction we want to follow until there is an exhaustion of that trend. As we have been telling you, the bullish sentiment had been rather high, the market oscillators were showing overbought conditions and all signs were pointing to downside. Instead of a decline of any consequence, the market traded in a sideways fashion and our indicators have moved to a more neutral position.
The chart here shows that while the weekly indicators have more room for upside, the daily is clearly pointing to more downside pressure in the absence of good news (or bad news should I say?). Friday's drops caused the short-term charts to all go into oversold though. The Dow and the Nasdaq charts look much the same as the S&P.
Bottom line, more downside to come. The consumer confidence numbers, the bullish sentiment and the inability of the Dow to push through the 11,000 mark for the umpteenth time spells trouble for this rally. I don't think we're going to get a push down to the March lows but that swoon I spoke of before has yet to get rolling with any determination. The Fed meeting is what is putting everything on ice for the moment. That'll be over on Tuesday and the market will go on to do what it wants to get on with.
I, like you, want to be on the right side of this trade. How are we going to profit on it? First, I'll be watching the action on Monday though I suspect it'll be much like last week, directionless, volumeless and lacking much conviction. If the lows of last week are broken to the downside, that's when things will get more interesting. The low for the Dow was 10,774, for the S&P it was 1240 and for the Nasdaq it was 2097.
I'm a big fan of history. My dad used to make my sister and me listen to "history" stories when we were little. I hated him for it at the time as it seriously cut into my playtime. However, I now have a great appreciation for digging up nuggets of bygone days to forecast future events. It works in economics and yes, sometimes it even works for the market.
If we go back through time, we have seen a few double bottom type patterns that are displayed on the current Dow chart. I have made the notations on the charts as I see them. The first three charts are 1990, and two from 1994. Each of those had similar advances off the second leg of their bottom formations - an average of 7.7% gain and then a 4% to 5% retracement. In the fall of 1998 however, there were several events coinciding to bring gloominess to the market, notably the Russian default and the Long Term Capital Management debacle. Greenspan flooded the market in liquidity then just as he has done now. There was a 25.5% advancement off the lows then and a subsequent 7.4% decline on the roll of the rally.
Now we've seen a more subdued 17% advancement as the source of our swoon is economic in nature rather than short term scare issues of 1998. Maybe my method is questionable but this is just my opinion - you do your own if you like. I see that the 7.4% decline is 29% of a 25.5% advancement. If you take a 30% value of a 17% advancement, you get 5.1%. If you take 5.1% of 10,995 the high for this leg, you get 560 points, or a retracement to 10,435. That corresponds right in the vicinity of the Fibonacci retracement of 38%.
It's Just a Trade
It's fun to read, ponder and talk about the market but really it makes no difference in trading. Trading is about a defined game plan, discipline and finding your own edge. All of the things we read and study and expect to happen based on that takes time. Shoot, I was buying gold stocks back last August in anticipation of all this. I was a bit early I think. Those options turned to dust. We must seek high probability trades. Oscillators must oscillate; they have to come down when they're overbought and go up when they're oversold.
The market is full of emotional decisions on the parts of millions of nameless and faceless people. This is why patterns are duplicated and replicated time after time. We must find the way to exploit that to our benefit and have the discipline to stay alive for the next trade.
I've made no bones about it, my money is once again on the downside. Show me to the door if I'm wrong Mr. Market. I'll happily get long if you tip your hand that way. You're the boss.
Enjoy the rest of your weekend everyone!