So Much For Follow-Through?
Remember the explosive rally from Friday? After spending the day snoozing in front of my computer, the contrast between today's quiet range-bound trade and Friday's explosive moves at the open and then again at the close was striking. Once again we were back to light volume, drifting markets and stubborn resistance levels.
As Jim Brown so correctly pointed out in the weekend Market Wrap, Friday's action had all the earmarks of simple short-covering with no true buying to continue the move. Proof of that dynamic came at the open this morning as the broader markets fell quickly on scattered bearish news. There was nothing stunning, but it was enough to reign in the bulls.
There's nothing bullish to point at here, as the DJIA reversed right at the descending trendline, right in the middle of the recent trading range. And daily Stochastics hasn't been able to get into overbought territory for over a month. Will this time be any different? Maybe, but a strong push through resistance will likely have to wait for increased volume, which hopefully will arrive after the Labor Day holiday.
The NASDAQ Composite finally found support near 1817 last week, but the index has been unable to reclaim the high side of the 1934 level (previous support) due to a lack of buying enthusiasm. Look at that rate of ascent on the daily Stochastics. It has now exceeded the highs from 2 weeks ago. If price can't top the 2000 level before the Stochastics oscillator begins to roll over, we'll have bearish divergence pressuring the index towards new recent lows. Despite spending much of the day in slightly positive territory, the weakness over on the DJIA was too much for the Tech bulls and they gave up near the close, settling for a -4.39 loss on the day. We need volume in this market if we're going to head higher.
The high points for the day started with Existing Home Sales, which came in at 5.17 million, weaker than the consensus expectation of 5.30 million. This just added to investor nervousness when combined with the continued rumors of job cuts at JP Morgan (NYSE:JPM). These rumors have been swirling around for weeks, and the firm isn't commenting on the issue. But other firms have been more forthcoming, with announced job cuts from the likes of Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MWD) and Merrill Lynch (NYSE:MER). It seems a pretty easy conclusion that we'll get the same from JPM...the only questions are when and how much?
And the significance of the cuts at major brokerages was spelled out in a piece on Briefing.com this morning by Patrick J. O'Hare. Mr. O'Hare boiled it down to the basics with the following statement. "...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." I couldn't have said it any better, myself.
Microsoft (NASDAQ:MSFT) delaying the release of its Xbox system in Japan so that they can focus on the upcoming holiday season in the good old US of A. Reiterating their target of 1.5 million units sold by the end of the year helped to keep the stock afloat, but it spent the bulk of the session trading in a narrow range. Buyers seemed to have gained the upper hand just before 2pm ET as the stock rallied through the intraday highs on increasing volume. But there was nothing to support the stock in the final 30 minutes and along with the broad market averages, MSFT came crashing back into the middle of its intraday range, closing with a gain of $0.26.
Barron's took a swipe at the Housing sector over the weekend, stating that Home Depot (NYSE:HD) has run up too far, based on excessive optimism over housing and consumer spending. Shares of HD pulled back at the open on heavy volume, but managed to claw their way back or a loss of only $0.95 at the close. Once again the descending trendline at $49.50 held sway, threatening to abort the stock's fledgling recovery. HD is not that important, except when you consider that numerous stocks (many in the Retail and Housing sectors) are moving in a similar fashion.
Shares of the nation's leading thrifts continued to be sold wholesale on Monday and the Housing/Thrift sector is at a critical juncture here as the Fed approaches the end of the current rate cutting cycle. Either the weakness in the Thrift sector is going to sink the last bastion of strength in our economy - the Housing sector - or the Housing sector will prop up the ailing thrifts. Eric Utley did an excellent presentation of the dynamics of these two sectors in his 12:00pm ET Intraday Update today. If you're looking for fertile ground for fresh trades, I would highly recommend reviewing his update. My bet is that the Thrifts are going to win this tug-of-war, and we are going to get a valuable piece of evidence tomorrow morning. Remember the Existing Home Sales report this morning? It wasn't a big miss, but it could be the first chink in the armor of a sector that has been keeping the US economy intact.
Consumers have continued to spend (at least according to the official government reports), providing much-needed support to our economy and supposedly keeping us out of recession. Tomorrow's Consumer Confidence numbers have the potential to be either a non-event or a barn-burner, depending on how they come in relative to expectations. Expectations are for a number of 117.5 and anything close to that will likely give new life to the bulls. But a significant miss would have the ability to devastate both the Retail and Housing sectors. Investors do not want to hear that Consumer Confidence is falling.
The major indices bounced back and forth between positive and negative territory as buyers and sellers jockeyed for the upper hand throughout the day. Volume on both the NASDAQ and the NYSE was very light, coming in at 1.18 billion and 849 million shares respectively. Internals were neither stellar or disastrous, with decliners outpacing advancers by a modest margin on both exchanges. Very little movement and very little to get excited about.
The real problem is that we are still in the month of August, and trading volume is exceptionally light, just as it is every year at this time. The negative market is keeping that volume lighter still and as Jim pointed out over the weekend, the smart move may be to just wait on the sidelines until volume (hopefully) comes back after Labor Day.
Remember to trade only when the reward/risk ratio is in your favor.
Mark Phillips Research Analyst