The Next Non-Event?
Divergence would be the operating theme here. Something I have noticed lately, and I am sure many others have too, is that consumer sentiment and the stock-buying public remain happy, and hopeful, respectively, while business takes it in the chops.
There is a feeling of buoyant expectation in the air that can be readily seen on CheerleaderVision (oops, I mean CNBC) that supposes a rally is soon to come, and life will again be grand just as soon as everybody gets back from vacation next week. [Note: The caption line at the bottom of the screen in today's Bull Session (no joke, that's the name of the segment) that says, "Where is the summer rally?" - a false supposition that one is due]. In short, where is the bottom?
Just as sure as the sun will rise tomorrow, the belief is that tech stocks will emerge from their 18-month tailspin, and Fed rate cuts will start to take hold of the economy and lift us out of recession. It has to happen because investors expect it! Riiight
Why? Because the consumer, the last bastions of economic strength, those lone individuals that will overcome the weak business climate to carry us to shore, say so. After all, it has been consumer spending that has buoyed the economy thanks in no small part to the Fed's huge increase in the money supply.
Unfortunately, the stock bubble has merely transferred to real estate - mostly home values. That fact is rarely recognized, and if it is, it is rarely given much credence and waived off like an annoying insect. In the minds of the investing public, things are about to get better and stock prices are about to rise again. The positive attitude and lack of fear is contagious. So where is the bottom?
Back to reality and the divergence of investors from it. While consumer spending may be the Atlas supporting the weight of the world on its shoulders right now, there is deep unrest in the business community that is transferring to the consumer unbeknownst, and partially ignored by the investing community. Business is not good and looks to get worse before it gets better. We can see that in the layoffs that keep coming, reduced hiring plans, and the finance sectors tip of the hand told by weak equity prices and slacking demand. Is that a bottom?
For instance, JP Morgan/Chase has been rumored for weeks to institute more job cuts ever since the CFO announced in July that cuts would exceed the initial estimates of 5000. By how much is not known. However, the Wall street Journal has speculated that it could be 8000 jobs. Job cuts have also been a hot topic among employees of other firms including, Merrill, Schwab, Goldman, Morgan Stanley, and Citigroup. If there were a market recovery on the horizon, why would a firm cut its headcount in the profitable M&A, IPO, and brokerage services division?
Answer: Not as rosy as the investing public thinks. Patrick J. O'Hare of briefing.com sums it up this way, "more job cuts at this stage of the game can be taken as a subtle admission that business conditions are expected to remain challenging. The Fed's easing actions, of course, have provided some reason to be optimistic about the market's prospects in coming months; nevertheless, when those who conduct the business that makes the stock market go round are cutting staff in an effort to bolster their bottom-line, investors should not be fooled into believing it is a sign of strength. On the contrary, in the current environment, it is a sign of continuing weakness." Maybe that is a bottom?
Dovetailing with that notion, our own Eric Utley of sister site, OptionInvestor.com (OIN) noted in today's market update, "The housing market has been deemed the savior of the broader economy thanks to the U.S. consumer. Indeed, strong housing economic news has confirmed that much recently, and continues to do so. But the big sell-off in the S&Ls may predict a reversal of trend in housing stocks. If that happens, the U.S. economy may take a turn for the worse and so will the market." That also fits nicely with today's release of existing housing sales showing a 3% decline.
Therein lies the divergence - an economy very much in danger of heading further south with the investing public, in the meantime hoping, and holding a belief that the economy can only get better from here. It must be a bottom.
We will be keeping a sharp eye on consumer confidence to be released tomorrow in addition to the Michigan Sentiment to be released on Friday. They may foretell a waning consumer. In the mix will be the Q2 GDP growth on Wednesday, which if negative (meaning 0.0% growth or less) would be the first of only two nails needed in the coffin to officially label our economy "in recession". It could provide a big, negative psychological effect and offer proof that Atlas, the consumer, is shrugging. A resulting bursting real estate bubble will not be any prettier. But not if this is a bottom!
Keep in mind; this is only one long-term take from Fundamentals Guy. Trader Guy sees things slightly differently, which is based solely on the charts. There is no gloominess here, except perhaps from the stale market environment that makes any trend barely discernable and nearly over as soon as it is recognized.
Nonetheless, our charts are the instruments of profit and as agnostic chart readers, we should be open to profit without regard for the direction in which it is made. We trade what we see, not what we believe.
Dow Industrials chart INDU):
Follow-through? There is an overused media word, right along with "stealth". Despite champagne wishes and caviar dreams, all we see is fish bait and old beer. The weekly chart shows a mis-drawn neutral wedge, which should be descending. There was no conviction on Friday's move up and the Dow sold off today on nearly its lowest volume this year, which is no surprise for late August. Also, the daily chart true to its lines drawn two weeks ago smacked head-first into resistance at Friday's highs (not un- coincidentally at its 50-dma), it fell from there once again showing that 10,400 resistance is stiff. Yet the stochastic remains pointed up for now.
Sure to take air from the Dow's sails are the 60/30 charts. While showing candle support at the day's lows, the falling stochastic may be suitable for swing trading puts. Check the gameplan for that one.
NASDAQ-100 chart (NDX):
With blinders on, and looking at nothing but weekly and daily stochastics, the NASDAQ-100 chart looks genuinely bullish. Fast over slow crosses and emergence of both fast and slow lines from oversold. However, we cannot look at oscillators in a vacuum. They must be coupled with candle action too, which does not show much strength in this case. Note the doji, indicating indecision that formed on both weekly and daily charts today, and on low volume to boot. 1600 is holding as major resistance, with the 50- dma above it ready to provide more at 1672, a target at which to shoot, and the next horizontal line of resistance. While the immediate 60/30 charts are showing stochastic weakness and might make a suitable put trade, there is just no volume that makes it a sure thing.
However an interesting diamond pattern has formed on the 30-min chart that might be educational. Usually these carry more validity on a daily or weekly chart. But the pattern usually ends with a new down-leg. Not this time. We can clearly see a breakout that took place with 2.5 hours until the close. The day- trader would have been all over that with calls. But given the low volume today, the breakout carried no meaning. A trip back south would have also been suitable for gunslinger-type put trades.
S&P 500 chart (SPX):
The story with the SPX is pretty similar to the Dow. Weekly stochastic is showing signs of life as is the daily, but both are turned back at resistance at roughly 1185. . .and for good reason. The 20-dma is at 1187 and the 50-dma is at 1200. Getting through that in this market environment will be tough, especially as the daily stochastic approaches overbought. The 60/30 will provide some stochastic challenges too as they are rolling over and threaten to break Friday and today's support.
All that said, is there anything different about today than the many weeks preceding it? In short, no. Volume remains light, traders remain uncommitted, and there is no catalyst for upward direction other than the notion that interest rates will soon work their magic on the economy. Unfortunately as noted up above, there is plenty of catalyst for downside moves, which are largely getting ignored. Try as investors might, it is still hard to hide an elephant in a cherry tree. While scalps can be had by daytraders in either direction, the swing trading environment is still tough with neither side scoring a win and both bloodied up in the process.
One other challenge the bulls face is the VIX now standing at 22.44. That shows an uncommon level of optimism for a market that cannot get off the launch pad. Once again, proof of the divergence in sentiment and reality. If investors are sentimentally bullish with no upward price action, I await the day they get bearish, as I will be ready with shovels of money to buy a truckload of puts.
But that day is not upon us yet. The sideways, listless action will likely continue throughout the week with perhaps a slight upside bias based just on the stochastic reading. If you are fortunate enough to have a vacation this week, congratulations! There is probably not a better week for it.
For the rest of us, keep your hand on your wallet and only trade the high odds setups, which are few and far between right now. But rest assured there will roughly two opportunities this week for decent profits if played correctly. As Tom Petty says, "The waiting is the hardest part".
See you at the bell.