It may be far too soon to make any definite bullish predictions but there are some signs that there may be a bounce ahead. With the very low volume the last several days it would be tough to apply much validity to improving technicals but they are there just the same. It could be that the bears are just getting tired more than the bulls staging a rebound but next week should supply the answers.
S&P-500 Chart - Daily
Dow Chart - Daily
Nasdaq Chart - Daily
SOX Chart - 90min
The only economic report for Friday was the Internet Commerce Sales for Q1 and at $15.52 billion it was the second highest quarter on record and a +28% jump over last year. Sales only dipped -$2B from the record holiday sales in the 4Q. This is a very strong confirmation that the Internet is not only here to stay but picking up speed and acceptance by consumers.
We need to shift some of those Internet sales back into tech stocks which posted their sixteenth straight week of outflows from tech funds. Overall fund outflows eased to a negative outflow of only $600 million for the week ended Wednesday. This was far less than I expected and far less than the -$2.5B outflows for the prior week. Considering the drop by the Dow to the lows for the year at 9852 on Wednesday a week ago I had thought the outflows would increase. Chalk up one point for a potential bounce ahead.
Oil prices fell again as OPEC prepared to meet this weekend in Amsterdam to discuss raising production quotas. Saudi Arabia Oil Minster Ali al-Naimi said he would ask OPEC to raise production quotas by more than two million barrels per day. Saudi wants to knock prices down below $40 to prevent long term damage to oil demand. As long as prices are high the sales outlook for gas guzzlers drops sharply. Automakers and consumers revert back to high mileage vehicles. This does produce a longer term lessening of demand and eventually it lowers oil prices. With oil prices high companies begin to explore alternate energy sources for new plants. Again, the long term demand then declines. With prices high the demand for new domestic drilling as well as drilling in non OPEC countries skyrockets. This brings on new supply and depresses the prices OPEC receives. OPEC wants to keep the prices in the sweet spot where demand and prices are balanced and they control the cash register. They have to raise production targets this weekend to prevent these things from taking place. Wal-Mart said on Friday that customers in their survey were losing $7 per person per week in buying power due to high oil prices. Falling oil prices ahead? Chalk up another point for a potential bounce.
The Fed is going out of their way to press the point that rates will only rise if the economy rises. This seems to point to a Fed that is not sure the economy has risen to the level where a rate hike is necessary. The bond market has already priced in several hikes as well as the stock market. If those hikes were to be pushed later into the year then the market may be under priced. Bernanke hammered this point home once again as did McTeer with their "rate of increases dependent on the economy" comments. Fed fund futures are now showing only a 94% chance of a rate hike in June. Cracks are beginning to show in the prior premise that it was guaranteed. They are however still predicting a 25 point hike in August. A potentially friendlier Fed? Chalk up another point for a potential bounce.
Volume for the past week has been very light despite some rather big swings. For three of the last four days up volume was significantly above down volume despite the failure of a bounce to hold. Over the last four days up volume accounted for 8.7B shares compared to only 5.3B on the down side. New 52-week lows have fallen to only 167 on Friday compared to 1181 on the big drop on May 10th. Friday had the fewest 52-week lows since April 22nd. Improving internals? Chalk up one more reason.
For the last two weeks the markets have plateaued at support across all the varied indexes. The SPX came to a dead stop at the 200dma at 1080 last week and tested it on three separate days. For the last four days the SPX support has risen to 1090 and it has defended it very aggressively. The SOX appeared to make a low the first week of May at 435 and has been making progressively higher highs and lows ever since. We are not seeing a charging bull in the SOX but more of creeping support now in the 455 range. The very strong Book-to-Bill report Thursday night should provide additional support for the semi sector.
The major indexes all seem to have found a support level that they can defend. The Wilshire-5000 defended 10500 last week and 10600 this week. The Nasdaq defended 1880 last week but upped the ante to 1900 this week. The $BKX.x banking index hit a low of 90.62 on May 10th and has been moving progressively higher for two weeks and closed right at a two week high on Friday. If financials are back can the other sectors be far behind? This outlook is not without its problem child. The Dow has been defending 9900 for the last two weeks but is showing little signs of mounting a real rally. Because of the very narrow representation in the 30-stock Dow I am giving it less weight in light of the improvement in the broader indexes. Support that can't be broken? Chalk up another point in favor of a rebound attempt.
Three times last week the markets tried to produce a rally. Three times they failed but the low for the week was on Monday. There are buyers coming back into the market as evidenced by the 50% higher up volume than down. The real problem was simply overhead supply waiting for any rebound attempt. Eventually that supply has to be depleted. There is also a chance the rallies failed (or were caused) by option expiration activity. There was huge open interest in the index options and ETFs and hedge funds with billions under management can push low volume markets around like leaves in a tornado. Program trading for the week was 50.5% of total volume. This is NOT arbitrage programs that just key on fair value discrepancies as they only came to 13.8% of the total. These are programs triggered by very big players with one thing in mind and that is getting in or out of positions in a hurry. Considering the low volume and the amount of program trading and the extremely high option open interest I think the fact we did NOT break support is bullish. Chalk up another point.
GE is being bought. The low print for GE was Monday's open and it was all up from there. The gap open on Wednesday was hit hard by that monster sell program Wednesday afternoon but Friday saw those losses almost erased. GE has fought for support at $30 for the last month. Five times that support was broken intraday and each time it was quickly bought. Monday was the last time it traded under $30. If GE, the proxy for the economy, has successfully defended $30 for the last time and is being bought then can a real rally be that far away? Get the chalk again.
Throughout this commentary we have been making points in chalk, not permanent marker. While there are some serious yet subtle signs of a potential rebound there are still some problem areas. The Dow is one of those areas. Several stocks in the Dow are spiraling into rapidly lower lows. For instance, GM, PFE, VZ, UTX, C, MO, CAT and MCD to name a few. They are offset by some of the others like HD, INTC and AXP that have strong uptrends in place but it will still be the weaker index.
There are still some negatives in our future and they include the Iraq turnover and the FOMC on June-30th. You have the FBI issuing new warnings about suicide bombers in the U.S. and attacks a multiple McDonalds abroad. The election will continue to be a producer of uncertainty but Bush appears to be weathering the storm. CNBC did a survey of 28 market analysts and all 28 said the market favored a Bush victory over Kerry. Assuming there are no new surprises like the Iraq prisoner abuse and oil prices do moderate I think traders will begin to ignore the election risk. That leaves us with the normal summer doldrums ahead and the earnings warnings in June just before the Fed meeting. There is still a rocky road to be traveled but most of the risk is still a month away.
Just because there may be another rebound in our future does not mean it will stick. We saw what happened to a couple +100 point moves last week. They evaporated as quickly as they appeared. For the Dow the 10050 resistance appears solid but a strong break there could trigger substantial short covering with initial higher resistance not until 10200 then 10300. That would be a huge rebound and I would be surprised if that is in the cards for next week. If we could just get over 10100 I would be pleased. The Nasdaq has strong resistance at 1935-1960 and a move over 1960 would be a strong move.
The key point is not that there might be a rebound attempt in our immediate future but that it may be too early to expect it to succeed. The lack of any real selling pressure last week may have just been a pause for option expiration or a pause in hopes we do get a real bounce they can sell into. You just never know until it happens. The SPX 200dma is still intact at 1081 and still the line in the sand that any rebound will be built on. Should that line fail we could easily see Dow 9600.
I would also remind everyone that our biggest drops lately have been on external events like the change in the Indian government. These things can never be predicted and will pop up when they can do the most harm. Always keep your stops in place whether long or short the market. Monday after option expiration is not normally a strong day in either direction as there is too much settling in progress to enter new trades. This produces somewhat higher volume but on both sides of the ledger. If my speculation is correct and we do get a rebound attempt next week I would watch prior resistance levels very carefully for signs of weakness. If sellers are still waiting overhead then don't fight it. If we do fail again and our current support levels are retested (9900/1880/1080) I would not hesitate to buy the dip but be prepared for a potential support failure. One more test could just be a strong bottom forming but a failed test could produce a significant drop.
I received an email this week that said essentially "don't take both sides, are we going up or down?" I seriously do not think I take both sides. I do paint the picture for both sides so everyone can understand the pros and cons of the current market. However, I think I have been explicit in telling you to "sell the rallies" for several weeks. Last Tuesday was the first time I recommended a neutral position because I saw support strengthening. Of course Wednesday was a monster rally that should have been sold again. Hindsight is always 20:20. Okay, to avoid confusion for Monday and using the SPX as a guide, buy a bounce from 1080 and sell a failure at 1120. Under 1080 begins a new leg down. The game plan is simple. I hope everybody is now on the same page.
Enter Very Passively, Exit Very Aggressively!