Caution and defensive posturing appeared to direct trading behavior Wednesday. Some recently beaten-down sectors such as the SOX gained, and one recently gaining sector, the oil services sector, fell. That decline occurred after the Banc of America downgraded the sector. The SOX added 0.88 percent, and the OSX, the Philadelphia Oil Service Index, declined 1.77 percent. While the Nasdaq, the SPX, and Russell 2000 managed positive closes, the gains proved modest at 0.35 percent, 0.18 percent and 0.07 percent, respectively, while the Dow lost an equally cautious 0.06 percent. On the NYSE, advancers and decliners matched almost exactly, with only 5 more issues advancing than declining, while the Nasdaq displayed slightly better breadth, with the advancing/declining ratio at 17/14. Volume proved tepid at 1.4 billion for the NYSE-traded issues and 1.6 billion for the Nasdaq-traded ones.
Numerous factors produced the caution. One analyst noted the positioning of many stocks or indices within consolidation patterns. Another noted that 59 percent of stocks trade above their 200-dma's, a neutral rating. Besides these technical considerations, caution continued ahead of Thursday's decisions by the Bank of England and the ECB, any proclamations that might come out of China later in the week, and Friday's U.S. jobs numbers.
Also, many Asian bourses remained closed Wednesday, so traders had to gauge global sentiment without the help of the Chinese and Japanese markets in overnight trading. China remained silent this week after last week's measures meant to cool its overheating economy. Some market watchers had postulated that last week's order (or suggestion, according to the Chinese government) to banks to cease lending activities until May 1 signaled their intention to raise rates over the May holidays this week. That prompted a sell-off in global bourses last week, but so far, news sources have not carried any information about rate hikes.
Miners, plunging after China's measures appeared especially intended to dampen the commodities industries, began rebounding this week. In overnight trading, Australian miner Rio Tinto Group, billed as the third largest miner in the world, also eased concerns by commenting that China's demand for iron ore remained strong, with that comment reassuring some markets. BHP Billiton, billed as the largest mining company in the world, closed the day 2 percent higher. Still, trading in the mining stocks remained cautious ahead of this week's rate decision by the Bank of England and the ECB. The daily chart of the XAU illustrates the effect on the gold and silver miners.
Annotated Chart of XAU:
European markets began the day trading cautiously, with banks headed down in the U.K. and up in the eurozone. After the release of the eurozone services industry index number, showing a modest rise to 54.5 in April from March's 54.4, European stocks began bouncing off their flat-line levels and climbing guardedly higher. Increased export demand balanced languishing consumer demand on that eurozone number.
About the time that European bourses began those tepid gains, our futures began gaining, too, but the pre-market action of the futures could best be described as cautious or choppy. "Cautious" was the correct description for the market open, too, with the Russell 2000, Dow, Nasdaq, and SPX all opening near the flat-line levels. Those technicians who watch the first five minutes of trading for market guidance had narrow ranges upon which to base their calculations for the day's action.
Banks garnered much of the attention in the UK, Europe and the U.S. In the UK, a unit of the Royal Bank of Scotland's purchase of Charter Financial sent banking stocks lower. In the eurozone, German banks gained after Dresdner Bank reported its first net profit after five quarters of losses. Other eurozone banks gained, too, with Credit Suisse saying that it remained optimistic about this year. Germany's Schroeder reportedly urged that German banks should consolidate soon. The FTSE 100, CAC 40, and DAX all closed higher, with the FTSE gaining 0.49 percent; the CAC 40, 0.77 percent; and the DAX, 0.79 percent. The DAX recovered the 4000 level again, closing at 4022.10.
In the U.S., Charter Financial surged, jumping from a close Tuesday at $35.95 to an open at $44.00. The stock closed at $43.86, up 22 percent. Although I don't believe that either the BIX or the BKX includes CF as a component, both banking-related indexes posted gains in early trading. Here caution and defensive posturing soon asserted itself, also, as these indices traded in a narrow range.
Annotated Chart of the BIX:
Perhaps that caution toward banking stocks could be partially attributed to the Mortgage Bankers Association's release of the composite index of mortgage loan applications. For the week ended April 30, mortgage loans rose a healthy 4.4 percent, with purchase and refinance indices rising 4.1 and 4.7 percent, respectively. Adjustable-rate mortgages fell, however, and the refinance proportion of the mortgage activity stayed steady. A look at stocks that might be impacted by a slowdown in refinancing showed stocks such as Sears (S), Whirlpool (WHR), Lowe's (LOW), and HomeDepot (HD) displaying mixed trading patterns, so that it was difficult to make any judgments about the reception of the Mortgage Bankers Association's numbers. Those stocks tended to show either small-range days or else small-bodied candles with long shadows or wicks, perhaps confirming the indecision, but that conclusion may be a bit of a stretch.
At 10:00 EST, the Institute for Supply Management released its index of U.S. services industries, showing April's number rising to 68.4 from March's 65.8. Estimates for this number had ranged from 60-69 according to one report and a narrower 63-65 according to another. One market strategist commented that the ISM number, while increasing, demonstrated a loss in momentum. The ISM attributed the rise to increased consumer spending due to job gains and tax refunds, and corporate investments that led to increased demand in the services sector. The prices-paid component rose to 68.6 percent from the previous 65.7 percent, while the new orders and employment components rose more modestly.
With our economy deemed a services-based economy, the markets spent a few minutes digesting the number and the various components and then began climbing. Market watchers soon tempered their enthusiasm. Indices quickly settled into symmetrical triangles on their five-minute charts, suggesting that the breakouts would not come until later. The indices began breaking through the bottom support of those triangles about midday, with the Dow one of the first to break through that support and the S&P 500 one of the last.
However, caution can attach itself to selling behavior as well as to buying behavior, and the indices didn't retreat far. They soon rose to test those broken supporting trendlines. The SPX was the first to retest that trendline, too, and the only one among the Dow, Russell 2000, Nasdaq, and SPX to do so, showing that it was performing strongly relative to the others. The Russell never closely approached that former supporting trendline on the five-minute chart, and, by the end of the day, even the SPX had produced a possible intraday, unconfirmed H&S just below that trendline. Other market watchers differed in the relative ratings of the indices, labeling the Nasdaq as the strongest-performing index and attributing that behavior to Banc of America's upgrade of Dell to a buy rating from its former neutral rating. Dell closed higher by 1.13 percent.
Earnings reports produced mixed results, contributing to the hesitation and uncertainty, with CVS gaining 1.35 percent after its Q1 report showed the company beating estimates by three cents. Big gainers included Cypress Semiconductor (CY), gaining 5.83 percent after raising forecasts for Q2 earnings but not revenue; IMPAX Laboratories (IPXL), soaring 17.61 percent after reporting its first-ever quarterly profit; Mace Security (MACE), gaining a whopping 80.48 percent after reporting a 300 percent gain in revenue from one unit; Hong Kong's telecom firm PacificNet (PACT), heading up 29.74 percent after raising its Q2 outlook and approving a stock buy-back plan; and RF Monolithics (RFMI), climbing 7.62 percent after the manufacturer of radio frequency components raised its Q3 outlook. Other gainers in the news included Coke (KO), gaining 1.63 percent after naming E. Neville Isdell its new chairman and CEO.
Brokerage and insurance services firm Prudential Financial (PRU) headed down 1.75 percent after reporting 74 cents per share, beating estimates by a penny, but other stocks fell harder. Decliners balanced the advancers, with optical- components manufacturer Bookham Technology (BKHM) plummeting 33.11 percent after reporting a Q1 loss; Gric Communications (GRIC), a mobile and remote worker software-maker, diving 44.51 percent after reporting a Q1 loss and saying it likely would not make a profit all year, thereby collecting a downgrade from Needham & Co.; Ligand Pharmaceuticals (LGND), dropping 15.51 percent after reporting a bigger-than-expected Q1 loss, although that loss was narrower than the year-ago period; online travel services company Orbitz (ORBZ), dropping 7.33 percent after lowering expectations for Q2 revenue; and perhaps of particular interest to those watching the homebuilders, Palm Harbor Homes (PHHM), falling 12.27 percent after announcing a plan to reduce debt and raise money for general corporate purposes by selling convertible notes.
Without guidance from Asian markets in overnight trading, with remaining uncertainty about the timing of U.S. rate hikes and rate hike decisions due in Europe and the U.K., with big advancers competing with big decliners, and, most important of all, with uncertainty over the jobs number due this Friday, perhaps it was foreseeable that markets would display uncertainty. That indecision proves evident from a study of the index charts.
The Russell 2000 trades within a formation that some deem bearish, but it hasn't yet broken to either the upside or the downside.
Annotated Chart for the Russell 2000:
The Nasdaq remains mired in a large triangular formation.
Annotated Daily Chart for the Nasdaq:
The SPX sports its own triangle. Although these triangular formations are generally considered continuation patterns, and so suggest that the breakout will likely come to the upside, it's possible to look at the SPX pattern from another and less neutral-to-bullish perspective, adding to the confusion.
Annotated Chart for the SPX:
The Dow's chart displays the same indecision as seen on other index charts.
Annotated Chart for the Dow:
Caution ruled the trading pattern on Wednesday and indecision colors these charts. As painful as it might be for active traders to wait for markets to break out of these consolidation patterns, I don't believe we'll know which direction the markets are headed until they do so. I also caution that trading can become more volatile and less conducive to technical analysis as the triangles narrow toward their apexes. When will those breakouts occur? Not until a catalyst occurs.
Wednesday afternoon through Thursday morning, retailers report their same-store sales figures. Among retailers reporting Wednesday afternoon, Men's Wearhouse (MW) reported April same-store sales up 10.4 percent, American Eagle (AEOS) reported sales up 8.3 percent, Hot Topic (HOTT) SSS rose 0.7 percent, and West Marine (WMAR) SSS rose 7.6 percent. Somehow it seems unlikely that same- store sales would provide the catalyst that would finally break indices out of their months-long consolidation patterns, however. More likely catalysts would include some of the possibilities mentioned earlier: a surprise decision Thursday morning by the ECB, a pronouncement out of China, or a new development in the Nikkei, opening for the first time in three days. Even those seem unlikely catalysts as the global economic community awaits those U.S. jobs numbers on Friday. That's the more likely catalyst.
A small possibility exists that tomorrow's U.S. economic numbers could produce movement in the U.S. markets, but caution and indecision may keep market participants from reacting to these reports. Economic reports for tomorrow include the Q1 Productivity number to be released before the market opens, with estimates ranging from a 3.0-4.0% rise after last quarter's 2.6% rise. Although with inflationary worries rising, some attention will be paid to unit labor cost index component, the GDP's Employment Cost Index last week already broke the bad news that costs were increasing faster than expected. Most do not consider Thursday's number market moving because the GDP gives an advance look at this component. In addition, initial claims will be released ahead of the market open, with at least one forecast at 344,000, a drop from the previous 346,500. Since this number can be volatile, market watchers will probably give more weight to the non-farm payrolls to be released Friday.
While "caution" was the word-of-the-day for Wednesday's trading, perhaps "patience" should be Thursday's. Those consolidation patterns near their breakout points, but by the nature of those patterns, we must remain patient until they do.