Cornbread and Beans Again
Maybe time to get ready for steak and potato chips? No I don't really care that MSFT announced their earnings date of July 18th. The thinking there is that by making the actual date so close to today's announcement that there isn't any bad news to warn about, and thus, the earnings are going to be OK. MSFT didn't guide up either, but you can't keep a good bull down.
Nor do I care (at least for trading purposes) that George Bush presented his plan to establish a Palestinian State over the next three years. Some would suggest that's the reason for the rally today. Fact is that the markets had already moved up a great margin off their lows prior to Bush's first utterance.
Those are not good reason for steak and chips. Nope, what I'm gauging is sentiment based on what charts tell me. Today, we saw a near re-test (970) of September's S&P 500 closing low of 966. Similarly, the NASDAQ tested the September 27th low of 1418 by posting a low today of 1414. The Dow has so far, fared better than both.
Furthermore, the recovery off today's low was met with stronger than usual volume of 1.57 bln shares on the NYSE and over 2 bln on the NASDAQ. While this was going on, the negative volume that had swamped positive volume early today had reversed to slightly in favor of positive volume by today's market highs. That was really solid action. But in the final hour, the positive volume fell apart and the negative volume again held the advantage by the close.
Another piece of the puzzle is that the VIX fell back (only slightly) under 30, thus demonstrating investors'/traders' sloughing off a bit of fear.
But in the end, no steak and chips - at least not yet. We'll be watching for the daily and 60-min stochastics to hit oversold again and for the VIX to pop back over 30, heck maybe 40, meanwhile, again, testing support. Bulls shouldn't rejoice yet. I equate this to coming 500 miles a cross the desert with dwindling water and knowing water is "only" 40 miles away. When searching for the bull, as in searching for the water, we may know where it is, but we're not there yet. And when we do finally get there, it will amount to a bullish correction, but still within a primary bear market - just like a pond, but still in the middle of the desert with many mile until completion of the ultimate crossing. Until earnings justify prices, this market will continue to slide for - dare I say it - years.
The speculative excesses will take that long to correct; the Dollar will have to rise again against other currencies and Americans will have to pay off some major debt to begin saving again.
Did we begin that process with today's rally off the lows? No way. It's no secret that Fundamentals Guy is building an Ark, not just predicting the weather. To that end, I've been reading up on big picture items - huge debt, inflationist monetary policy, no personal savings, sinking Dollar - these items make the American stock markets pale in comparison. What follows are some interesting snippets from stuff I've uncovered.
From Bill Gross of Pimco Bonds: "After all, think of the obvious - how does a government ease its way out of a debt crisis? By eroding the real value of debt with a bit of unanticipated inflation; by cheapening its currency; by bolstering nominal corporate profits; by levering up the public sector (federal deficits) and in so doing delivering the relative debt of the private sector. Bingo."
More: "It (U.S. economy) has morphed through the years from an economy primarily based on production, to one substantially reliant on growth via debt and new derivative life forms. We now live in an age of paper, and this paper maché facade is not a permanent, nor lasting one."
My take: This jibes with John Rutledge's positing a few months back, which I relayed in a Trader's Corner, that we are experiencing a massive asset redistribution from paper (stocks, bonds, derivatives) to tangible (gold, real estate, lumber, oil).
Here's yet another black eye for Merrill Lynch, not that they need one while one of their high profile brokers figures large in the Martha Stewart insider-trading hullabaloo. From a Reuter's article, "Fifty-one percent of 280 fund managers who oversee $711 billion in assets said in a Merrill Lynch survey that U.S. earnings are the worst in the world when it comes to predictability, volatility and transparency. Not seeing any improvement any time soon, the managers say the U.S. stock market is the one place where they most want to be underweight."
My take: Any Buy rating issued by a Merrill analyst, especially on CNBC, ought to be met with a cold, skeptical shoulder. More to the point, nearly half of those surveyed by Merrill (49%) still think this is a market in which to remain invested. Well, perhaps 51% of CNBC guests (at least the ones that manage funds) will now recommend their clients underweight the U.S market? Don't bet on it. There are still 49% that need converting. Only then will it be safe to don pointy horns again.
Oh, this just in. . .Trim tabs is reporting a net outflow of $15 bln (with a "b") from mutual funds over the last four weeks. Janus alone had redemptions of $1.3 bln. Investors are clearly voting with their feet and leaving the building. . . just like Elvis.
OK, let's look at the charts quickly. I'm not going to spend much time here tonight since, were I not to show charts, I could merely say that the dailies still need to reach stochastically oversold before I become convinced of a real trading rally. To boot, the 60-min charts are rolling over already from today's overbought rally. For those that appreciate a visual though, here are all three major markets.
Dow Industrials chart - INDU (weekly/daily/60):
I'd expect 9100 to be tested again, or even 9000. Today does not constitute a much hoped for V-bottom reversal. And even if it did, this is still a bear market.
NASDAQ Composite - COMPX (weekly/daily/60):
No trend reversal in sight. But long-term support held today. Still 60-min chart rolling over and daily not yet to oversold. Let's see if 1414 holds or if it heads to 1387, the absolute September low.
S&P 500 - SPX (weekly/daily/60):
Same story here. Daily stochastic falling, but not there yet; 60- min rolling over. Support at 970, then 966.
However, in the background are two statistics that are likely to go unmentioned. First the Russell 2000, the broadest market indicator actually fell today compared to other indexes. Still, it remains far off its September low of 373. Even more to the point, while the Dow rose today, the Transportation index went negative. The latter is a bad sign for those strict Dow theorist who look for the transports to confirm the Dow's move to confirm a bull market.
For tomorrow, hard to say exactly what this market will do. However, with sentiment still negative as measured by daily and 60-min stochastics, coupled with a VIX at 29.97, I think there will be further tests of support to come this week. And with every test, hopeful bulls will jump the gun to buy the very bottom to which the bears will respond by shorting the rally. If that sounds like a week of solid volatility with big potential for swings, you're right! Just what a trader wants! But for the buy and hold crowd, the day to buy is not yet here. But when it comes, there may be even a few weeks to perhaps months of profit potential as the weekly stochastic emerges to begin another up- cycle from oversold. Again, it won't be permanent, but merely a bully rally within a primary bear market.
Trade 'em but don't fall in love.
See you at the bell!