With the bears hunkered down in their bunkers wondering what happened to their reinforcements the bulls are gaining in strength on a daily basis. Next week could see the bulls storming the trading floor and putting the bears into full retreat. The stars are aligning and the storm clouds are disappearing. Monday could be a decisive day for the bulls to attack.
Dow Chart - Daily
Nasdaq Chart - Daily
Russell Chart - Daily
SPX Chart - Daily
It was a report made in heaven for the bulls. The Jobs report showed that the economy gained +248,000 payroll jobs in May and like the Goldilocks porridge it was just right. It was not too low and not too high and the jobs gained were in the right places. The headline number was about +25K over the consensus estimates and not enough to energize the Fed into a rate hike frenzy. The good news came in the form of upward revisions to the prior two months for an additional +74,000 jobs. Over the past three months 75.4% of industries have added workers. Over the same three months nearly one million jobs have been created and this could go a long way to help consumer sentiment and election rhetoric.
This was the third excellent report in a row and there was no bad news. There were 32,000 new manufacturing jobs added in a sector that has been decimated. Average earnings rose and 173,000 of the new jobs were in positions making over $16 per hour. This quiets the claims that all new jobs are Wal-Mart or McDonalds quality and shows the depth of the recovery. Too bullish for you? Me too but that was what the airwaves were blasting all day. Bullish sentiment was simply oozing out of every news report.
The bad news, what there was of it, came in a serious jump in the Fed funds futures. The futures are now showing a +75 point hike by the August meeting. There is only one meeting between now and the August 10th meeting and that is on June 30th. According to the futures there is a 10% chance of the 50-point hike being in June and a 30% chance it will be in August. We can expect those numbers to vacillate greatly as the month progresses. Just as the debate heated up on Friday we had a speech by Fed Governor Kohn on "The Outlook for Inflation". A very timely topic in view of the coming Fed rate hike series.
The net of his speech is that the Fed still believes that the inflation monster is still slumbering despite the recent rapid jump in some indicators. Kohn said the Fed believes the jump in inflation was simply due to a rebound from abnormally low inflation over the last year. The rebound merely put the standard inflation rate back into sync with an expanding economy. He said while the Fed will remain cautious they still believe there is sufficient slack in the economy to prevent inflation from rising significantly in the near future. That said he did warn that the current Fed funds rate was too low and the Fed would be raising soon but he echoed and emphasized that there was no reason to rush the process and it will be removed at a measured pace. Glad to see they all have the key catch phrase firmly imbedded in their vocabulary. The bottom line is calm in bond market despite a two week high in the ten-year yields and calm in the stock market despite multiple rate hikes ahead.
Just when you thought the stock market could not have any better news oil prices closed at a five week low at $38.49. The OPEC posturing and bad mouthing oil prices for the last couple days has kicked the props from under the speculative oil market. No longer are the ripe profits there for the picking and traders are beginning to lighten up just in case oil supplies begin to increase in July as OPEC promised. In reality almost everyone I have heard claims OPEC is already pumping the two million barrels they claim they will raise production and there will not be any new oil coming to market. Regardless, traders are being much more careful about long positions in a falling market until some more details are known. With oil closing today nearly -$4 under Tuesday's levels the transports finally found a bid on the hopes the oil crisis has passed.
To wrap the week we had favorable reports from Intel and PMCS to help the chip sector along with an expanded growth outlook from the Semiconductor Statistics group. The Intel mid qtr update Thursday night came on the heels of three down days for the sector. Friday's relief rally added +1.61% to the SOX and we have the TXN mid quarter update on Monday. You would think the positive chip news and rebounding Russell would give the Nasdaq wings. Unfortunately it didn't and the Nasdaq lost -8 points for the week. The Nasdaq appears stuck on 1980 and has traded across that line, sometimes multiple times for the last six days only to close at 1979 on Friday. What is up with that? The 50 dma is 1978 and it is trying very hard to move above that level. We have traded over 1990 six times only to fail each time. Resistance has been tough as we approach 2000 and it only gets tougher as we try to move higher.
The Dow however has moved continually higher for the week and even succeeded in hitting 10300 on Friday after a four week dip. Unlike the flat Nasdaq the Dow gained +54 points for the week which may not sound like much but the trend was definitely higher. Unfortunately there is monster resistance at 10325 and any continued rally will face a tough uphill battle but support is gradually rising.
There are no material economic reports next week until the PPI and Consumer Confidence on Friday. Greenspan testifies before the Senate on Thursday regarding his re-nomination. This means we will trade almost the entire week on stock news with the Thursday testimony the first real drag on the bulls.
I started this article with commentary that next week could see the bulls press the attack. Last Sunday I said this week would likely be range bound and attempts to move higher would fail until the Jobs report was history. Now that the numbers are on the board and good news is breaking out all over the bulls should be smelling greener grass ahead. Believe it or not there are only four weeks left in the quarter and the earnings cycle will begin again. We are moving into the warning period for the 2Q and so far there has been almost none. Estimates are still being raised and the economy does appear to be picking up speed.
In any other year this would be the recipe for a rare summer rally. The challenge is the convergence of events on June 30th. We have the Iraq changeover, FOMC meeting, the end of the quarter and Russell rebalancing. It is also an election year with the incumbent in trouble. Stir all these ingredients together and you get a witches brew forecast.
This is how I read the road map. Oil prices are falling and OPEC is going on the offensive on prices. Regardless of any new production they appear committed to push the price down. This is bullish for the market for multiple reasons. The Iraq changeover has already been factored into the market. At least the idea of the changeover has been accepted and the optimists think that will be the end of the news. The pessimists know better and fully expect an increasing number of terrorist activities in Iraq as we near the date. I would not be a potential government official in Iraq for any amount of money. They are walking targets. While I think traders have factored in the changeover they will still react to the increasing attacks as the date approaches.
The FOMC meeting is a given. A 25-point increase has already been factored in and to some extent there is already an expectation for more. I am sure we will see some volatility around the meeting but I cannot imagine an outcome that would sour the market. If they did raise +50 and I doubt it for political reasons, the market would just ratchet down its expectations for August and proceed. The wild card that I think will have the biggest impact on next week is the election. Typically election summers tend to be positive when the incumbent is ahead. The jobs numbers were very positive for Bush and a serious blow for Kerry in terms of political talking points. You can expect positive comments and better poll numbers next week and that should encourage the bulls.
This analysis suggests the bulls will TRY and press higher but there is very strong resistance at 10325/2020/1130. The ideal scenario would be a strong Asian/European performance on Sunday night and a gap open for the U.S. markets on Monday to these resistance levels or even higher. The overnight futures can sometimes overcome resistance levels that cash trading cannot. A futures gap at the open sometimes causes short covering in the cash that will overcome sellers at certain levels because they become less confident during periods of high volatility. A slow creep up can be met and measured over an extended period where a strong gap open must be reacted to immediately or face strong losses. But, that would be the ideal scenario not necessarily what will come to pass.
However we get there any push to resistance will need some serious volume to overcome those levels. Friday's volume was barely three billion shares across all markets. We will need a lot more conviction than that to breakout to a new range. The more likely scenario is a slow chipping away at resistance with spikes to new highs that are quickly sold but a continued series of higher lows as support continues to build. With no economic news and very little stock news expected it could be another range bound week that resembles trench warfare more than a cavalry charge.
I would normally say sell resistance here but with current resistance so close and with support rising the bigger move could come on the long side. I know moving higher will be tough and we are not likely to breakout the first time but I think the best plan is to buy the dips in anticipation of a breakout. Dow 10200 has held for three days and 10150 for three days before that. Those would be my target levels for any dips. The Nasdaq has such a narrow range for the week that its support at 1970 is only 10 points below its midpoint at 1980. I would hope for a lower dip but not count on it. The key is event risk for next week. Any negative events could provide an entry point and I would not hesitate to take them. Just keep your stops tight on the entry just in case our dip turns into more than just a dip.
Don't be misled by my suggestion to buy the dips. Current resistance is VERY strong. Look at the S&P and Dow charts above for a very good visual picture. Moving higher will be tough if not impossible but as long as support keeps rising and the news continues to be good we have a chance. We could also return to the bottom of the channel but there is nothing on the horizon for Monday to provide that strong of a dip. I think the risk is on the side of the bears and the bulls are growing stronger. Hopefully the week will prove that theory.
Enter Very Passively, Exit Very Aggressively!