The rebalancing is history for another year and the quarter is over. Whew! Unfortunately earnings warnings have another week to go. Still the Dow finished with only a ten point loss for the week but stretched its losing streak to six weeks in a row. Volume was strong with 2.13 billion on the NYSE putting it in the top five days of the year. The Nasdaq managed a whopping 2.5 billion shares as most of the Russell additions were Nasdaq stocks. With the huge "artificial" volume from the rebalancing unable to move the markets the prospects for next week are less than sterling.
Chart of the Dow
Chart of the Nasdaq
The economic reports on Friday started the day off with a caution. The Chicago PMI dropped to 58.2 from its peak at 60.8 in May. It was expected to fall some after the May surprise but new orders fell strongly from 65.6 to 61.4. This worries many analysts that the slide could be heading toward another weak quarter and a double dip recession. Inventory drawdowns were slower than expected and it appears the manufacturing sector may be losing momentum. Mass layoffs increased for the third month in a row and impacted 180,000 workers. This does not account for the 17,000 from WCOM. There were 1,726 mass layoffs for the period with 28% from the manufacturing sector. This was the fourth month of increasing layoffs. Not surprisingly Personal Spending fell by -0.1% while Personal Income rose +0.3%. It appears the consumer is finally beginning to take the slowdown to heart. The Michigan Consumer Sentiment final June numbers dropped -4.5 points to 92.4. This was revised slightly upward from the initial estimates of 90.8 but is dropping due to the stock market, scandals and war worries. This was the biggest drop since the September attack. Excited about our prospects yet?
The scandal of the day was Xerox on Friday. Seems that they incorrectly booked nearly $6.4 billion in revenues. Surprised? After being grilled repeatedly for the last couple years and paying a record $10 million in fines to the SEC for prior accounting errors it was revealed today that the problems were not over. CNBC kept running a recent interview with the CEO a couple weeks ago where she guaranteed that all the skeletons were out of the closet. Evidently she was not very well informed. The additional $4 billion in errors just turned up in an audit. XRX lost -2.00 to $7.01. The problem is not the XRX restatement since it will actually help their earnings going forward, it is simply another hit to investor confidence.
That investor confidence was even more shaken by news that the Dow posted the worst 2Q since 1970 and the Nasdaq posted the worst first half ever with a -25% loss. The S&P posted the worst six months since 1974. The Dow has lost ground for six consecutive weeks. With over 100 million investors in the U.S. everyone has felt the pain. The Nasdaq alone has lost more than -$739 billion in market cap this year. That is real money that evaporated from brokerage accounts, retirement accounts and mutual funds. That works out to about -$7,390 from everyone with an account. I know I paid my share and some others as well. Those losses may not be over.
The rally off the Wednesday lows was nice to see but it was prompted by the end of quarter window dressing and Russell rebalancing. It was not prompted by the urge to buy stocks by the retail investor. Fund managers had stockpiled cash on the sidelines to handle redemptions ($9.2 billion last week) and to wait for the bottom to pass. If their prospectus says they will maintain only 5% cash and remain fully invested but they are sitting on 20%-25% cash due to current conditions then they want to put that cash back into the market, even if it is just overnight, to "cook" their books. They can factually show that as of June-30th they had only 5% cash and a portfolio of blue chip companies. All this cash being "stashed" in the market over the last three days prompted the rebound off of Wednesday's lows.
The Russell also helped boost the markets over the last few days as speculators took positions in the new stocks in order to sell to funds at a higher price at the close. In many cases it did not work since they ended up selling them back into another shorting opportunity instead. While there was some nice gains at the close in these stocks, many of them had already sold off due to no pre-close bounce. There was just no real buying demand and most of these stocks close with only minor gains for the day. Just look at a one-minute chart of PFCB or JBLU to see what I mean about the close.
The broader markets rolled over just below resistance and closed near the lows of the day. The Dow gave back -110 points from its high. This was not the way to close out a week with multiple bullish events driving volume. The holiday shortened week ahead will begin with the ISM report on Monday and end with the nonfarm payrolls for June on Friday. The volume is expected to be very light, probably half of this weeks average volume or less. This is the last real week for earnings warnings and those companies trying to slip in unnoticed may be waiting for the holiday confusion. The markets will probably be knocked around by program trading like a tennis ball at Wimbledon on the light volume. It was reported today that program trading accounted for 45% of the NYSE volume last week. This is an all time high and shows not only the strength of the programs but the absence of any retail trading. It may not be that program trading has exploded but retail trading has disappeared. It should be noted that program trading is just that, "trading". It is not buy and hold institutional investors deciding that stocks look like bargains today. To qualify as a program trade it must contain at least 15 stocks and have a value over one million dollars.
Resistance targets for next week are 1485 on the Nasdaq, 500 on the OEX, 1000 for the SPX and 9400 for the Dow. Since we tested all those levels and failed on Friday's strong volume I doubt we will break them next week. It would be very bullish if we did. Probably more important is the initial support levels of 9100 for the Dow, 1420 for the Nasdaq, 480 on the OEX and 970 on the SPX. This is where the rubber meets the road. If those levels hold then maybe the summer rally fantasy becomes a reality. If they break, again, then we are looking at not just a retest of the Sept lows but an entirely new leg down. Helping the bearish view this weekend is the cover story from Barrons. They are making a point that the market is not going to recover from these lows anytime soon and it could be years before a positive market returns. Great, just what we need.
A reader emailed me Friday and said we were at a bottom. Seems he was at a casino and the dealers were talking about how bad the market was and there was no hope of a recovery in stocks. This is the opposite of the several different stories about calling market tops because the cab driver, shoeshine boy and waitresses were all giving hot stock tips. The ultimate contrarian indicator. Unfortunately these indicators are not instant or timely and simply reflect the abundance of sentiment at the time in question. We all know the current sentiment is lousy. Any stock TV program or the finance section of the newspaper will poison your mind with the various disasters of the day. Until some positive news begins to develop I think the markets will continue to test new lows until they just can't push them down any farther. There are still quite a few stocks with prices that exceed historical valuations by a wide margin. This is not the signs of a bottom.
Remember, volume is the weapon of the bulls. We have strong volume this week and could not break the first line of resistance. Very weak volume next week favors the bears. Be prepared!
Enter Very Passively, Exit Very Aggressively!
On Thursday we posted the first "guest writer" article in the Traders Corner. It was about using Bollinger bands in long term trading by Surya Kavuri. Surya has another article about the NDX in the Sunday Traders Corner. I also received several other inquiries by some interested traders. We will be posting articles from them soon.
If you feel you have a specific trading style, technique, indicator, market view or anything that would benefit our readers, please email me and lets give everyone the benefit of your experience. Everybody has a different view of the same market and how to profit from it. We will review it and publish the best ones in the newsletter. They don't need to be pretty or professional, just well thought out with enough documentation to prove your case. If you are a successful trader in this market then others want to know your secrets! Email Click here to email Jim