Resistance Holding, But Bulls Are Snorting
With a strong open this morning, it looked like the bulls were going to take a serious run at resistance. But their enthusiasm faded almost as quickly as the sound of the opening bell and all the broad market averages fell back from their opening highs. Renewed rally attempts near the middle and end of the day were likewise rebuffed by the bears, resulting in mild losses for the day.
The scorecard had the DJIA losing just 15 points, the NASDAQ Composite giving up 11.20 and the S&P500 drifting lower by 1.30. With such minor moves in the major indices, it might seem unnecessary to include any of the associated charts, but the daily chart of the big index (S&P500) looked too good to pass up.
Of all the major indices, it does the best job of showing a bear market rally. The lows have been continuing to move lower and the highs are too. On top of that, Stochastics are starting to weaken and aren't even close to entering overbought territory. Earnings season is already starting to wind down, and we have yet to receive convincing news that the economy is on the mend. The past 2 days have given us classic doji candlestick patterns, which is a sign of investor decision. This is precisely what we saw in the markets today, with neither the bulls or the bears able to gain a significant advantage.
Helping to keep the S&P500 under pressure were bearish comments from CSFB before the open. The brokerage firm cut earnings estimates for the big index from $55.25 to $51.50 for FY01 and from $62 to $59 for FY02. Not to be left out, UBS Warburg and JP Morgan also cut their earnings estimates for the S&P500, citing the usual list of suspects; lack of earnings visibility, strength in the dollar cutting into earnings from the big multinationals and the overall economic weakness. Yawn...no news there!
So what DID happen in the markets today? Remember Jonathan Joseph at Salomon Smith Barney? He was the first chip analyst to start saying mean things about the Semiconductor sector last summer, and incurred a lot of wrath from irate investors who were long the sector. Well this morning he was out saying nice things about the chip industry again, saying he is now seeing some support for his April upgrade of the Semiconductor sector. Mr. Joseph cited relative stability in the spot market for microprocessors and general firmness in DRAM prices. Not a glowing endorsement, but the bulls tried to rally the sector. The SOX index did manage to hold above the $600 level, but owing to the directionless overall market was able to do little more than challenge the upper bound of its descending channel before pulling back in the afternoon.
The SOX has been unable to sustain an upward move since topping out in late April. If the NASDAQ is going to manage a sustained advance, it will need the Semiconductors to participate, not just breaking out of the descending channel, but moving up to challenge the $700 resistance level.
Retails stocks got a boost this morning from Walmart (NYSE:WMT) as the discount retailer reported on the first wave of tax refund checks. The company stated that same-store sales growth last week exceeded the 3-5% increase that was expected, driven by the first batch of tax rebate checks arriving in mailboxes across the country. WMT's ploy of cashing the checks for free seems to be paying off as 25-30% of the checks cashed are being spent in the stores. Investors ate it up, popping WMT up to test the $56 resistance again at the open, then again at 2pm ET and then a third time just before the close.
The WMT enthusiasm helped the Retail sector continue its recent advance, and the S&P Retail index finished the day just below resistance in the $912-915 area (depending where you draw your resistance line). The consumer is still the anchor leg for our economy, and if the WMT news is any indication, Joe and Jane consumer are still behaving as though everything is just fine. A serious advance in the broad markets will need to be accompanied by a breakout of the RLX above current resistance and then the $932 area.
The Software sector received another blow today, this time from Adobe Systems (NASDAQ:ADBE). The maker of computer graphics programs issued a warning of sorts, saying they were on track to meet their third quarter earnings target but might miss the revenue target due to the weaker-than-expected economic conditions, which are affecting all product segments. That kept the Software index (GSO.X) under pressure all day, holding the index below the $200 resistance level.
Rounding out the list of sectors having a significant effect on Monday were the Biotechs. Friday's FDA panel rejection of Aviron's (NASDAQ:AVIR) FluMist gave the BTK index the flu and it led the list of losers on the NASDAQ, shedding 2.65%.
Looking at the market internals brings everything back into perspective. Volume was downright anemic at 905 million shares on the NYSE and 1.34 billion on the NASDAQ. Advancers outpaced decliners on the NYSE, while decliners ruled the day over on the NASDAQ. But the margins were pretty thin. It would be just as accurate to say there was no strong bias in the market. Welcome to the dog days of summer, where light volume rules. Earnings season is winding down and while there have been some bright points, they haven't been frequent enough to really change investor sentiment and get the markets moving in a renewed bullish trend. The pattern is the same regardless of what index you look at. Resistance is holding, but bullish traders are becoming bolder and less fearful of each intraday dip.
The economic calendar offers little hope for a market catalyst either. Tuesday brings the Personal Income report, Chicago PMI and Consumer Confidence. Cued up for the remainder of the week are Auto and Truck Sales and the NAPM report on Wednesday and then Initial Jobless Claims and Factory Orders on Thursday. Rounding out the economic parade on Friday are Non-Farm Payrolls and the Unemployment Report.
Despite the lack of a catalyst to the upside, bears need to use caution in this market. Dull and quiet would definitely describe Monday's market action, and shorting a dull market can be a recipe for disaster as dormant bulls charge forward. Wait for the market to show its true colors by either advancing or selling off with conviction (read:volume).
Trade only when the reward/risk ratio is in your favor.