A Classic Day in Rangebound, Technical Trading
One day after the NASDAQ closed at its 200-dma at 3958, technical traders commanded the market. I think I'll just step aside while those trading desks do their stuff. Yet, what initially looked like a boring day, turned out to be rather interesting. It's beginning to feel like things are slowly starting to heat up as September quickly approaches. So what does this mean for the direction of the market? Let's look at a variety of developments that have the markets moving.
First, the Fed is out of the picture at least until November with Monday's announcement being a non-event. Investors can check that worry off the list. Like Jim said last night, you knew it was coming, and many investors and traders took the opportunity to sell into the close yesterday, and somewhat this morning. Today was picture perfect, rangebound, technical trading. Traders brought the NASDAQ down to 3900 within the first hour and from there, it bounced solidly on buying interest. And they kept buying and buying until about 3980, blowing past the 200-dma at 3962. Looking at the intraday chart below, you can see that the sellers took the NASDAQ back to test the 200-dma as support twice within a half hour, just to be sure. The rest of the afternoon was a steady climb to the next opposition of 4000. Now, as it slowly approached that level, I curiously watched the chart's every tick. What were these trading desks going to do? Would they headfake on the buy side, then pull their bids to jump on the ask? After a few minutes at 3999, they continued to bid the index right on through 4000. The NASDAQ closed at the high of the day, up 52.80 at 4011, a rather significant feat considering that it hasn't closed over 4000 since July 25th. Another trading fact is that the NASDAQ traded in a 100 point range, after being down 56 points at the lows. Haven't had that since August 3rd. So we are seeing some interesting developments as Labor Day approaches.
Granted, volume on the NASDAQ was a light 1.43 bln shares, it does have a solid uptrend since August 3rd. The tech stocks are strengthening and September seasonally is a good month to own them. While the NASDAQ most likely will be rangebound until after the Labor Day weekend, the upside bias is clear and investors may have begun to snatch up some of those beaten down high-fliers. Semi stocks have been on that list. Yesterday, after the close, the Book-to-Bill ratio for North American chip manufacturers was released for July and it came in at 1.23 versus June's 1.27. In layman's terms, this means that orders for chips were 23% higher than shipments for the month of July. Typically, this figure drops in July as the cycle slows, but this is a rather neutral move showing that future orders should remain strong. To add to that, Merrill Lynch analyst Brett Hodess notes that the decline from July came more from "an acceleration in shipments (rather) than from slowing orders." Further confirming the demand in the sector, the WSJ reported that a shortage of INTC's Pentium III XEON microprocessors is creating tremendous backlogs. INTC said that they have been aware of this for nine months, as well as their customers, and that they are "ramping up manufacturing across the entire product line." The Semi Index(SOX.X) was up almost 3% today, given the outlook. Individual issues had buyers flocking to them: INTC(+2.50), AMAT(+3.44), KLAC(+4.69), NVLS(+3.06), and TER(+3.69). Eat your heart out, Jonathan Joseph! Doesn't look like this cycle is slowing!
Over at the NYSE, the INDU managed to squeak out a 5.50 gain today on light volume of 864 mln shares, closing at 11144. It was an up-and-down session for the INDU as well, but the trend was decidedly up after the index fell out of bed this morning. Generally mirroring the NASDAQ, the INDU hit its low of 11059 by 10:10am EDT, only to recover throughout the day. During today's climb, the index paused to drop back and establish intraday support at 11100. But, without the Financials, which have been leading the market, it was difficult to cover any new ground for the INDU. Financials came under pressure from profit takers, who decided to clip some of their proceeds. JPM was down $2.50 and C fell $1.94, coming off recent highs. Yet, it's time for the Financials to take a breather, considering the strong rally they have had over the past month. A little consolidation before September wouldn't hurt one bit. We will be watching this sector carefully to reestablish its leadership to drive the markets higher in the Fall. Technically, you can see on the chart below that August has brought an impressive rally to the INDU, and establishes it soundly above 11000.
Propping up the INDU today was XOM(+1.38). The October crude oil future contract gained 80 cents to close at $32.02, after hitting an intraday high of $32.80. This comes after the American Petroleum Institute(API) released data showing a 7.8 mln barrel, larger-than-expected decline in oil inventories, bringing it to a 24 year low of 279 mln barrels. The Energy Department only reported a 4.1 mln barrel decrease and an inventory of 284 mln. This lower inventory causes short-term price inelasticity in supply, resulting in greater price volatility. Also, concerns over the hurricane season in the Gulf, a key production area, can add uncertainty to oil prices, translating into volatility. For consumers, this means that relief at the pump may be further off than expected. For oil service stocks, it means new all-time highs and continued uptrends.
Some interesting developments in the world of high speed Internet access came from SBC Communications. The company announced that it would start testing its "neighborhood gateways" that will allow them to reach more businesses and consumers with DSL connections. There are ten other phone companies that will participate in the tests to be performed in California and Texas. SBC ensures that rivals will be able to take advantage of these "gateways," in order to ease FCC concerns over stifling competition. Right now, DSL can only be offered within a 3.5 mile radius from the central office, in general, so there are constraints on the reach of high speed Internet access. SBC wants to connect "neighborhood gateways," or sub-stations, to the central office, and then connect from there to the consumers. The end-result should be more DSL connections to the consumer quicker. SBC was up $0.56 to $40.19.
Looking forward, I think it will be of the essence to watch these markets very closely the next two weeks. We are at an inflection point as the summer end draws near. Financials and Techs are what will drive this market into the Fall. I will be waiting for an entry opportunity, hopefully after a pullback and/or a consolidation. Once the volume comes back to add conviction to these recent moves, we could be off to the races. Yet, for now, as I mentioned above, we are still rangebound and the big-money trading desks are running the show. Will it be 4200 first or 3800? Volume has been light, and its return will indicate that money managers are back with their shopping carts. Another indicator that continues to be of concern is the VIX.X, closing at 19.88. It's screaming over-bought! We will have to wait and see as September draws near. I'm not bearish here, just cautious as the summer has humbled many. Until a discernable trend makes itself clear, remember, when in doubt, stay out.