Despite the extremely low volume of only 1.5 billion shares across all markets the Dow ended within two points of a new 52-week closing high. The previous high was 9323 on June-17th and that level could be history if the current trend continues on Monday. Could this be the breakout the bulls are waiting for?
The Dow has traded over 9300 on eight days since the 9323 close nearly two months ago. It has moved up, down and sideways for much of those two months but is finally showing an increasing amount of resilience. Considering all the negative factors we have seen this week this is an amazing feat. Current support has risen to 9285 and short of a strong shift in sentiment we could see a breakout next week. That will not be an easy task and the deck is still stacked against it but the bulls appear to have mastered the art of climbing the wall of worry. They will have to pass their greatest test next week.
Friday had limited economic hurdles for the market with the biggest challenge just getting open and staying open. The CPI came in at +0.2% as expected with the core rate +0.2% also. The energy component rose +0.4% and helped hold the index up. Medical care also rose +0.5% and continued its +3.8% gain over the last 12 months. Core inflation has held to +1.5% for the last four months and suggests both deflation and inflation risks have stabilized.
Helping encourage investors was a jump in Industrial Production of +0.5% and well over estimates of +0.1%. All major components reported increases but with Capacity Utilization at 74.5 it was only .2 above the 20-year lows we have seen over the prior two months. This was good news but not as good as most traders hoped. The whisper number was 75.0 and we did not come close. This suggests the economy is continuing to improve but at a snails pace that may not create a 4Q recovery. The factor which will help the most is the low inventory levels which will mean a strong ramp in production should any real demand appear.
Going against the positive CPI and Industrial Production numbers was the NY Empire State Manufacturing Survey. The headline number fell to only 10 from 20.8 in July and 27.6 in June. This plummeting indicator was ignored by the markets with the power problems taking the headlines. New Orders fell to 12.5 from 15.1 but the employment component rose to zero from -9.5. The six-month outlook rose to 59.5 from 51.8. We could be seeing some summer decline but the improving jobs and outlook components could be signs of a rebound for the Fall.
Unfortunately the next Empire Survey will likely show the impact of the blackout and could easily drop into negative territory. This could also happen with the NY NAPM. Just when we were beginning to get clean data we will now have to wait for two more months for these reports to rebound from what could be a serious dip. Even if the reports were going to be negative for the current month they will be ignored as "blackout" reports. This will also be seen in the Jobs Report for August as this was the survey week. Jobless Claims will be impacted for next Thursday and any low number will be ignored.
The Michigan Sentiment report was rescheduled for Tuesday from Friday as a result of the blackout. Now, the question here is will the numbers be as of Thursday or as of Monday? Obviously any survey taken over the weekend would show a dramatic drop in sentiment and even if Tuesday's numbers are tame the revision in two weeks will be negative.
One positive result of the blackout was the flight to quality and into bonds. Yields fell back below the 52-week highs from Thursday but still remained at extreme levels. The 10-year closed at 4.528 after reaching a low of 4.484 intraday. Once the power problems are over and that should be before Monday, we could see the bond flight return. According to the bond junkies the 10/30 year instruments saw their worst week in recent history with the yields on the 10-year jumping from the prior Friday's lows of 4.19% to Thursday's high of 4.668%. That spread is nearly unheard of in the bond markets in a single week. However, contrary to the market reaction when yields soared to their previous high on August 1st the Dow closed back at its highs and has apparently shaken off the bond fears.
The most amazing component of the recent market has been the performance of the Russell-2000. Since the 450 low on August 7th it has been moving vertically until it hit the downtrend resistance on Friday. Considering the light volume we cannot make any specific analysis from the halt at resistance but this index bears watching for next week. If it can break out of the three year down trend then we could be off to the races. I mentioned the Russell last Sunday when it was at 453 and at the bottom of the initial August dip. I cautioned that should 450 fail we could test real support at 440. The instant rebound from 450 was encouraging and showed that funds were putting money back into small caps and the bond fears were easing.
Almost as impressive as the Russell but on a different scale is the Dow which has completely reversed from the test of 9000 on August 6th. The Dow has recovered to close within two points of a new closing high and has done so under difficult circumstances. For the last two days Dow 9285 has held like a rock and could be providing a spring board for next week. Still we could just as easily slip back into out two month trading range.
The Nasdaq is showing the least amount of excitement of the major indexes. The Nasdaq closed right on 1700 for the second consecutive day and it appears the bounce from the August lows could be running out of steam. The Nasdaq is about 30 points below its downtrend resistance if you include the artificial spike on July-31st. If you factor that out then 1705 is the current resistance and that is where we stopped on Friday. The Dell earnings did little to excite tech buyers but then they had much more on their minds on Friday. Dell did close up +95 cents on the news. Dell was the only major Nasdaq tech component in the green.
Also showing more weakness than the Dow is the S&P, which has been moving down in an orderly fashion from its June highs. The S&P has resistance at 992.50 and then again at 1000. The broader market is showing less resilience than the narrow Dow. The Dow has been buoyed by strong gains in MMM, UTX, WMT, MCD, AA and T. The composition of the Dow makes it more responsive to cyclical strengths and that is what we are seeing now.
S&P Chart - daily
There was not much happening on Friday other than the endless news stories on the blackout and economic factors for next week are slim. That makes this commentary brief today. There are not many ways to say we are at strong resistance on the Dow and very close to a breakout but other indexes are not confirming. With only 562 million shares trading on the NYSE and 704 million on the Nasdaq you cannot draw any real conclusions from Friday's trading.
Next week is very slim economically with reports on Housing Starts and the rescheduled Michigan Sentiment not until Tuesday. Wednesday is blank and Thursday only has Jobless, Philly Fed and Leading Indicators. Friday is also blank and that allows the markets to wander on their own for most of the week. Without being too repetitive we are at resistance and poised to either break out or down very easily. The Dow could actually move to a new high without the Nasdaq and S&P following and that would set up some even stronger divergence than we saw last week.
We have the perfect storm setting up. The blackout should be history by Monday. The buying in bonds on Friday as a flight to quality could see a reversal on Monday once the power problem is resolved. Traders not able to make it in on Friday should be back at work. There are no economic reports to confuse the issue. Options have expired with little market reaction and the residue of position squaring should provide enough volatility at the open to show where true resistance and support levels are hiding. The numbers at Friday's close are bogus due to the extremely low volume. There is a strong feeling among traders that we will see a big move next week. The only question is which way?
Enter Very Passively, Exit Very Aggressively!