Technicals, Not Talk, Tell The Story
Talk, talk, talk, talk. That's all we hear all day long on CNBC. Is it a "Summer Rally" or "Summer Doldrums"? Or is it April showers brings May flowers? As the talking heads continue to do what they do best, we try to see how many stupid catch phrases they spew out. Well, now that May has come and gone, we can look back and say that the markets weren't too rosy for the month. In assessing the markets over that time, some cry bear and others just cry. The hype has driven many mad and the truth is that no one has really shed any light. So the only thing left to due is look at the technicals. They provide the true story behind all of the trading and allow you to draw your own conclusions.
After yesterday's overly impressive rally in which the NASDAQ had its biggest percentage gain ever, I thought for sure that it would sell-off today. As much as I wanted to believe that most of the sellers had already been shaken out, the trend has shown us that where there are buyers, there are sellers. Not to take anything away from the rally, but as Jim mentioned in his wrap yesterday, the key question is can it hold? Investors and market watchers were eagerly watching today's trading for a sign of follow-through. Obviously, we would have liked to have seen increasing volume and a strong advance through 3500. Yet, after just touching that level an hour and a half into the session, the NASDAQ rolled over and traded in a narrow range, only to give up in the final hour. We had our chance today to breakout of this downtrending channel, but not enough money was convinced to make this the day.
This trend is nothing to balk at. It is a controlling trend that has frightened quite a few people. Noting the regression channel that the NASDAQ has been trading in since last testing the 4000 level, you can see the resistance and support levels clearly. Today, the sellers lined up at 3500 and proved that it was formidable resistance. It looked as if the NASDAQ could have gone either way into the close, but it just didn't feel right. Another dip toward the middle of the range may be in the future, and we will once again be watching for volume to return with the buyers. Without it, breaking this trend may be more difficult than these summer optimists think.
I know, I know. I said it. Volume. It was once again at the center of discussion today, yet with a little bit of a twist. For the past month, everyone on the Street was calling for a return of the extraordinary volume that we were seeing in the first quarter of the year. Finally, one of those talking heads popped up on the TV and said something that actually made sense. The analyst commented that we very well may not see those volume days of old as they were an aberration. In comparison to last year's volume at this time, we actually are having heavier days. The NASDAQ traded 1.5 bln shares and the NYSE exchanged 955 mln. Considering that we are headed into the summer when we perennially have lighter volume, days like these aren't too terrible. But, I still believe that heavier than normal days will be essential in breaking out of the downtrend.
Initially, the semiconductor sector continued its strong gains on more analyst actions. After yesterday's upbeat outlook for SDLI, the semis appeared to have reasserted themselves as leaders in this teetering market. Today, Morgan Stanley Dean Witter had positive comments for LSI Logic(LSI). They reiterated their Strong Buy and $100 price target for the stock, citing "very strong" business conditions going forward. LSI managed to hang on to some of its gains, closing up $2.63 to $52.63. Yet, that good news for the sector wasn't enough and the Semiconductor Index(SOX.X) finished in the red by 1.2%.
QCOM was the real disappoint today for the NASDAQ. Does anyone remember the $1000 price target issued late last year on QCOM? How can we forget. Well, QCOM fell even further away from that goal today as shares slid on fresh news out of China. According to analysts, there are now increasing doubts that a deal with China's second-largest telephone carrier will bear fruit in the near-term. China Unicom, the state-owned No. 2 telephone carrier, said on Tuesday it would not adopt Qualcomm's current-generation code division multiple access(CDMA) wireless telephone standards. Their approximately seven million subscribers use an alternative standard called GSM, the analysts said. Traders did not like this news one bit and shares of QCOM fell by $10 to $66.38.
Another NASDAQ general in the news was the mighty MSFT. As the software giant was trying to dodge the government's stones, their attorneys were preparing to file their final brief Wednesday afternoon, thus clearing the way for a remedy ruling. Don't be surprised to hear that U.S. District Court Judge Thomas Penfield Jackson will likely order a breakup of the software titan. This is just another step in the ongoing saga which will probably end up as an appeal in the Supreme Court anyway. Nevertheless, it will be all over the newswires once again. MSFT closed at $62.94, down $0.44.
I don't want to neglect the DJIA, which has also felt the pain of MSFT. The tale of the chart tells us that the DJIA flat-lined after touching just below its resistance at 10600. Its intraday high was 10599.43. Compared to the NASDAQ, the DJIA doesn't look as bad with a less dramatic downtrend. Jim's DJIA chart from yesterday illustrated how the Dow 30 has some headroom up to 10700, where the downtrend line currently lies. Looking at the 60-minute chart below, you can see that resistance is fairly light between 10600 and 10800. If it can move through the trendline resistance at 10700, 10800 isn't much of a problem. The 100-dma for the DJIA sits at 10735.
If a company in the process of improving margins is your kind of investment, then DJIA component Hewlett-Packard may be worth a look. Today, CEO Carly Fiorina met with analysts, painting an upbeat picture of growing margins in the PC business and sustainable top line growth. She also said Amazon has become one of their top five customers. This is due to a new deal to supply 90% of the infrastructure for the online retailer. Hewlett also talked about expanding their reach in the storage sector and becoming a more formidable foe to EMC. So HWP went up, right? Ehh, wrong. HWP slid by $4.31 to $120.19, though mostly in sympathy to the NASDAQ decline.
During the past two days, the DJIA has received help from the brokerage stocks and retail leaders. As Fed-watchers begin to see some slowing from the previous rate hikes, optimism that tightening monetary policy may be drawing to a close has increased. Adding to yesterday's gains, the following brokerage stocks had strong days: MWD (+4.94), MER (+4.00), AXP (+3.38), C (+1.88), and GS (+1.56). Other DJIA standouts include WMT (+4.25) and HD (+1.75).
Evidence of a possible slowing in the economy came in the form of New Home Sales, which were 909,000 versus an expectation of 940K. That is a 6% decline. Good news for those interest rate sensitive stocks. Also rallying on this news was the bond market as the 10-year note rose $0.72 to yield 6.28%. Due out tomorrow is the Chicago Purchasing Managers' Report which is forecast at 55.5%- with 50% representing the breakeven line between an expanding and contracting manufacturing sector. The big numbers that everyone is anticipating are on Friday. Non-farm Payrolls are expected to be 375,000 with an Unemployment Rate of 3.9%. Those two economic reports will be essential in defining the next direction of our drifting markets.
Keep your eyes on the markets' reaction to these economic numbers. They will make or break investor spirit this week. In a market that is looking for a reason to buy, any further indication that the Fed's previous rate hikes are slowing this freight train economy may spark the buying we need to break this downtrend. When trading, stay with issues or indices with which you are comfortable and don't risk what you're not willing to lose. Good luck and when in doubt, stay out.