Wolf in a Cage
Forget bulls and bears. Have you ever seen a wolf in captivity? When first captured and caged, even at a zoo with room to roam, it will pace back and forth across the bars left to right and back again looking for an escape route. As the months and years pass, the turning point at either end of its futile search narrows until the hapless but still-acting-on-instinct wolf plants his hind legs in one spot and merely bounces its weight from one paw to the other in frustration and indecision.
Sound like anyone you know? Maybe you? Maybe me? Maybe all of us collectively, as we wait for this constricted, range-bound market to break one-way or the other? While it ain't necessarily so, the wolf seems to have it easy, as it at least has a guaranteed steak at the end of the day. In this market, even Hamburger Helper looks good! But such is the nature of a market without volume. No volume equals no conviction, and makes any drastic move during summer vacation highly unlikely
So to what can we attribute today's final numbers? One word: Summer. Aside from that, the devil is in the details and investors are looking for any shred or sliver of evidence that might tip the hand to the economy's next move. In short, we have become a bunch of short-term, momentum-driven news junkies in search of the next economic report! But even news is not enough to give the markets any meaningful direction when the conviction of volume simply does not exist.
If volume were stronger, reports of slowing sales at specialty retailers, layoffs on Wall Street, and a stalling housing market might be important. The fact is they are important, but not enough people are around to care.
To wit: Specialty retail sales at ANF, ANN, GPS, S, and FD, all notably without bargain price points as a staple of their business, saw revenue fall substantially over last year. Meanwhile, discounters like TGT, KM and WMT all saw year over year gains. No surprise there. As people curtail spending, $300 tax advance or not, discount wins over full price any day. Market says. . ."big deal."
Oh, and the new home construction business that was on fire and telling us consumers were still spending? It appears that the "smart" money (read that fund managers on CNBC suggesting you buy) sold at the top. Take a look at the weekly DJUSHB (Dow Jones U.S. Home Builders) index.
Same story here. Analysts sang the praises of the sector and told us to buy, but the chart says they were selling. Why? Could it be that that housing interest rates have not fallen with the Fed's rate cuts? Yep. Think as many people want to buy a new home when the economy is showing signs of slowing? Nope.
Now assume the thousands on Wall Street that are about to be laid off (yes, the same ones that swore we were at a bottom just 60 days ago) have to confess times are touhg. After all, Morgan Stanley lowered its estimates on MER, GS, and SCH who are all laying off workers. (See? They do eat their young.) Secretly, they knew there was a recession, but saying so in the news did not help them sell stock. Thus their best interest lay in telling us that the bottom was in. Guess what? They are fired! How long will it take for Wall Street to proclaim we are in a market depression (I used the D word intentionally.) now that THEY no longer have jobs? It is not just "the other guy" any more, and that fact is hard to hide. Do not expect the economic outlook (nor housing sales) to get rosy from here especially now that Wall Street is laying off former bulls. "Oh, look Abbey! There IS an elephant in the cherry tree!" Duh.
While I may sound less than enthusiastic about the economy, that is easily divorced from the charts. For they belie the hope of bulls whether I agree with fundamental prospects or not. Check out the Dow first.
Down Industrials chart (INDU):
First notice the weekly chart is well, weakly. But the immediate time frame suggests bulls may be about to get the upper hand. The daily chart shows the possibility of a reversal from oversold. The daily candle (a doji) pushed all the way down to support of 10,200 and retraced its losses for the day to actually close up 5 points at 10,298. Piercing and rebounding off the lower Bollinger band is also testimony to some hidden strength. Notice too the 60/30 chart have found an uptrend, as indicated by the stochastics. But day and swing traders, do not miss that bear flag formed on both chart. Probably best to wait for a pullback on the candles to enter calls.
Is this the be-all, end-all bottom to end all bottoms? Not even close in my opinion. Fundamentals will not let that happen. But another daily cycle up the stochastic chart and failure at a lower high would convince me a breakdown at 10,200 is a high probability. At that point the weekly stochastic could be in full synch with the daily decline. Only a guess on my part as the markets remain locked for the next few weeks until volume (crossed fingers) returns.
The NASDAQ 100 also finished nearly unchanged. But as the laggard index these days, we no longer expect dynamic range moves from it, which would help explain its 36-point range today. For those keeping score, the NDX closed up nearly three points at 1628 on 1.45 bln shares. Let us look at the chart.
NASDAQ-100 chart (NDX):
Though the weekly chart is dead with the candles sinking and the stochastic rising, the daily chart shows a triple bottom with a bounce today from support at 1600, a number not far off the lower Bollinger band extreme of 1596. But NDX is weaker than the Dow as its stochastic has not yet entered oversold and remains falling. Common sense (not all that common on Wall Street, but found mostly on Main Street) suggest that has a higher probability of falling rather than reversing especially since the 60/30 charts are showing range-bound, choppy action, as their stochastics rise. I do not want to be anywhere near this index when the near-term stochastics fall unless I am in puts. Further gains may be hard to come by and 1600 may be just temporary support.
Finally, we arrive at the SPX, what I consider to be the "real" market, as it is comprised of the top U.S. market cap stocks. Where these lead, others follow.
S&P 500 chart (SPX):
While the weekly chart is looking a bit iffy right now, the daily may be setting up to grant bulls a small wish. Today's daily candle produced a doji bouncing significantly off its Bollinger band and what could be considered support at 1172. The SPX was bought all the way back up to its opening price at 1183 for no change on the day. Should 1174 prove to be a bottom as the doji suggests, we would have bullish divergence and a daily stochastic rising up from oversold. The 60/30 charts have already begun that action as the candles rise along with the oscillator. The caution is to watch out for bear flag formations, which could wipe out all of today's recovery. A break below 1178 would suggest weak action and further selloff ahead.
All of this is the long way of saying chop, chop, pop, drop, repeat, much like yesterday's Wrap title by Austin Passamonte. It is a market where overused words like bargain hunting and profit taking hold little meaning from hour to hour and day to day. Right now, there are few bargains and few profits.
With the VIX at 23.64, the market sits with a mild absence of fear. Should the market continue today's pattern and reverse upward from here, the VIX could fall to lower levels as the index stochastic oscillators cycle back up. Once topped out at a lower high with the VIX near 20, I would be much more comfortable taking put plays. As demonstrated today, a fall does not necessarily mean we will test new lows. So those playing the bear side only should be just as careful as the hopeful bulls.
Again, without catalyst (and warm bodies that can fog a mirror), volume will likely remain weak, which by definition means drastic moves are unlikely until September. It is possible we keep drifting between support and resistance for some time, limiting the possibilities for big kills like the days of old. Fortunately, we have expiration next week, which could make for some interesting action. In the meantime, money can still be made by selling time premium in covered calls, calendar spreads, and credit spreads. Gravity is a law of nature, and so is time decay. What goes up must come down, and premiums decay 24/7/365. We can use the latter to our advantage.
Watch for PPI numbers tomorrow morning. The market expects 0.1% on the wholesale level. More than that may explain why gold stocks and the XAU jumped big time today. Inflation may be closer than we think. Gone would be the haven that bonds provide just as is earnings growth for equities.
That's it for tonight. See you at the bell.