THE BOTTOM LINE
The main indices are now "confirming" emerging bull market trends as follows: the S&P 500 (SPX) with its weekly close above 960, the area of the August and December intraday highs - there was one new prior high weekly close, but it was followed by a correction week before last. I often talk about a DECISIVE upside penetration and we got that in the S&P and especially in the (Nasdaq) Composite - the COMPX cleared its December peak in the 1520 area handily.
The Russell 200 (RUT) has been leading the market for some two weeks now, showing us where money has been flowing. Only the Dow is a bit behind here, as it needs to clear 9000. With Microsoft (MSFT) and some other key Industrial stocks lagging (even though 28 of 30 were up on Friday), this may take a while longer - but at some point I anticipate we'll see a weekly Dow 30 close over 9000. (Even the long-struggling DJ Transportation average is back to just under its long-term down trendline, as travel picks up.)
It could happen that the current rally falls apart and that this is bull trap, but institutional money is following momentum here, a tendency that is forced on them by report card time at the end of each (performance) quarter and the next one is END of June.
LAST WEEK'S TRADING ACTIVITY -
We began the week with May consumer confidence at 83.8 compared to April's 81.0 reading slightly below the forecasted 84.0. But the consumer base was gaining a more positive future outlook, as the "expectations" index jumped to 94.4 from 84.8. Sales of existing homes increased by 6%, the 5th strongest month in history. And, new home sales ran up to $1.028 billion, relative to March's $1.011. Lower mortgage rates continued to pull in new home-buyers accounting for a big area of the economy.
Thursday saw Commerce report economic growth at an upwardly revised 1.9% Q1 rate (from 1.6%). Q1 GDP growth largely stemmed from stronger consumer spending and higher levels of exports - of course imports rose too and business investment was weak but the market is just more hopeful.
FRIDAY - Commerce said personal incomes in April were unchanged, as expected. Personal consumption dropped to -0.1% in April which was equal to January's figure, but the biggest decline in spending since the fall. However, some bullish positives were taken from the numbers: adjusted for inflation, spending rose 0.1% after increasing 0.4% in March so the two months together amount to a half percent - if this growth repeated for a year, it's a 3% growth in spending. Hey, the market is tired of being bearish!
The inflation adjusted figures were the key bullish interpretation - as prices for consumer products at the consumer level have fallen, you would expect total consumer spending to also fall, but when adjusted for inflation or lower prices, spending rose a bit.
Despite the overall decline in personal spending, spending on durable goods, items meant to last three years or more, rose 1.2% in April, after a 2.9% rise in March.
The Price Index for April was up 1.3% from a year earlier on a core basis, which excludes volatile food and energy prices. This so-called "core deflator" is one of Alan Greenspan's closely watched indicators. It's been pointed out as the lowest year- over-year gain in over 35 years. And while it does show that the inflation rate is declining, it may not yet mean that we've reached the deflation stage.
Fed chairman Greenspan has raised concerns in the market about the possibility that the U.S. could face entrenched deflation, which would be a widespread and prolonged decline in prices. These concerns are why there is talk of an interest-rate reduction in June. This prospect is fueling the rise in the market also.
A report on the Chicago Purchasing Managers Index (PMI) showed industrial expansion with a 52.2 reading, above the forecast of 49.0. The key is to be above 50.0 - above that figure some manufacturing expansion is happening.
FOR THE WEEK and MONTH -
For the month of May, SPX gained 5.1%, INDU tacked on 4.4% and COMPX jumped a whooping 8.9%.
OTHER MARKETS -
The dollar rebounded a bit - trading at 119.41 yen, up from 118.27 to the buck. The Euro fell to $1.1767 from $1.1884.
MY INDEX OUTLOOK -
S&P 100 Index (OEX) - Daily & Hourly charts:
My sentiment indicator has now had a couple of daily peak readings above 2.2 (see lower left, below) in the past couple of weeks, which is the approximate line where option traders are getting overly bullish, as I measure it. However, in a rising trend that has some decent fundamentals driving the market up, these extremes are not "automatic" sell signals - but such extremes do highlight potential for good-sized reversal within 1- 5 days. Especially when there are other patterns and indicators that support the same trading idea - example: the hourly "line" of repeated tops showing resistance and selling interest prior to the sharp reversal of week before last.
When the 5-day average of call to put volume also gets up toward the line, this is a "confirming" event as to potential to reverse - for example, in May. This may not be a reversal of the dominant trend of course, but it can be substantial move such in the 10-15 point range.
Besides the sentiment getting a bit overdone, there is technical chart resistance coming in around 485-487 based on trendlines and prior daily price peaks. Moreover, the oscillator type indicators are not "confirming" the move to new highs. The question then becomes is this enough to keep on the put side or buy puts into resistance? The answer should come by whether OEX can pierce those prior highs.
If yes, I get an objective to 492-495. If it goes to 495, there's a good chance that OEX will test 500. Anything around 500 would cause me to exit calls and look at buying puts as this is a number where selling should come in.
If there's a pullback and minor reversal FIRST, look for support in the 475-479 area; then, at 470. This might then be a place to turn to the call side, but this is getting too far ahead. On balance, I look for a maximum 470-500 range in the week ahead.
Dow Industrials (INDU) Daily & Hourly (DJX.X) charts:
I haven't looked at the Dow index in a while and it often turns up a somewhat different pattern or picture than the broader indices.
There's a mixed picture technically, just like there is fundamentally - huh, daaah! I get bearish when I see the failure of the oscillators to confirm the new highs (in price).
Not an automatic sell either but it's a darn good signal usually. I anticipate resistance coming in at 89 in DJX - if the Dow breaks out above 8900, then there's a shot at 9000. If so, I would exit any calls held in this area and will look to reversing to puts.
Near support looks to be 86.5 - if exceeded, then next anticipated support is 85.5 area.
I like trading the DJX at times as the Dow Industrials often trades very "technically" - meaning it gets in these well-defined price channels and trends well. My maximum expected range on the Dow is 8400-8450 on the downside, 9000 on the upside. Eventually, maybe this month we could see a move to near 10,000.
Nasdaq Composite Index (COMPX) - Daily & Hourly:
1620 looks like key resistance on the Nasdaq Composite. 1550 is key support - to maintain a bullish chart, COMPX needs to say above this level. However, the dominant up trend is not violated or broken unless there's a retreat to below 1520, especially on a weekly closing basis.
Last weeks move through resistance at 1520-1530 is what suggested the further upside. This area is where I would have renewed buying interest in the option-able NASDAQ index options should COMPX come back down to it.
The Semiconductor (SOX) index is the other key Nasdaq index to watch - if it starts LAGGING the Composite, be alert for a (downside) correction.
QQQ charts - Daily & Hourly:
My idea to short QQQ in the 28.5-28.75 area was shown to be wrong when the "line" of resistance at just below 29 was pierced, as can be seen on the hourly (close-only) chart below (right). A good stop for a short QQQ position was just over 29.00; e.g., at 29.15. I like to short in resistance areas, rather than on the way down, as with that strategy tight stops can be used to better control risk. Live to trade another day!
Key resistance now looks to be around 30.3-30.5 a the top of the hourly trend channel. Key near support is at 29.00. Next lower support is around 28.25 on a near-term basis. More major technical support is down in the 26.30-26.50 area, judging by the daily up trendline.
A likely range this week could be 28.5 - 30.5 and I would trade that range when selling and buying interest brings in repeated highs or lows in those areas, accompanied by what momentum looks like on the hourly and daily stochastics.
Right now, both hourly and daily stochastic models are saying yellow, caution as they're again nearing overbought readings - in synch with the current alerts from homeland security. I don't think they are correlated however!
Good Trading Success!