Both the Dow and the Nasdaq test last week's lows, the Dow holding and the Nasdaq falling below, and both reversed to the upside to close near the upper end of their day ranges. It was truly a tale of two markets, with the Dow posting a key outside upside reversal day, breaking Friday's low but closing above Friday's high. The Nasdaq, however, despite the doji bottom still closed below Friday's range, adhering to what is turning out to be a precipitous daily downtrend off the end-of-June window-dressing high.
Volume was at the lower end of "light" on both exchanges (see data above), and volatility was wild, with the VXO and QQV diverging higher as the VIX and VXN moved lower, the first taste of this month's op-ex week antics. Morgan Stanley was out predicting a retest of the May lows, despite Abby Joseph Cohen's reiteration of her previous almost perfectly-timed contrarian bullish recommendation from the previous week.
Weekly Dow Chart
The Dow tested the rising weekly support line with today's low at 10162. It's very early in the week to be assessing the current 1-day old weekly candle, but today's intraday doji bottom behaved exactly as one would expect for a support line that wants to hold. While the weekly cycle oscillators are a mixed bag, they did not decline last week, and the case can be made for a weekly cycle upphase trying to form from a higher price and oscillator low. As is so often the case with key trendlines, the move that breaks them is often a high volume, high drama gapper, and given that this one has been in place since the March 2003 lows, I would expect no less. As has been occurring with increasing regularity lately, the oscillators are in an ambiguous state waiting for price to resolve the dilemma. A weekly close below Dow 10150 or above 10200 will likely determine direction to the downside or upside, respectively- that is the range that I'll be watching this week. A closing break above 10400 would set the stage for a retest of the year high at 10795.
Daily Dow Chart
Today's print was a very bullish candle. A close higher within the range would have left a bullish hammer, but the bullish doji star closing above Friday's candle body is bullish enough for me. The move was strong enough to bury most of the sellers since Wednesday and gave the first suggestion of an upturn in the 10- day stochastic from a higher price and oscillator low. 10260- 10300 is key resistance, but the overhang from the June top from 10330-10350 should prove to be very stiff resistance.
Weekly Nasdaq Chart
The cycle ambiguity in the weekly Dow is apparent in the weekly Nasdaq as well, but the price is a little more generous in providing clues. The 10 week stochastic points up while the Macd points uncertainly south, but the price, holding as it is below the 1970 level, suggests a failure below the rising support line off the October 2002 low. The Nasdaq has been full of false breaks, and we'll want to see a high volume close below the rising support line this week to confirm the bearish break. Support from the previous weekly low coincides with lower Bollinger support at 1884, while resistance at the apex of the broken pennant is up to 1990.
Daily Nasdaq Chart
The Nasdaq tried but just couldn't get it together, anchored by weakness in the SOX. I've drawn the most bullish interpretation I see here, that of a falling wedge, but note that it's unsupported by the oscillator picture which remains overwhelmingly bearish. The divergence between the Dow and the Nasdaq is extreme- one of these two charts is going to the get with the program, and one is leading the way. Historically, that's tended to be the Naz, but in this case I'm not at all confident of that. In any event, the cycle points lower for the time being, with a low for the move printed today at 1920 with next support conveniently located at 1900. Resistance is at 1940, followed by 1960 and 1990. If my wistful bull wedge interpretation is correct, then an upside break would have an implied target as high as 2050.
Weekly TNX Chart
Bonds rose today, with the ten year note yield (TNX) closing lower by 2.3 bps at 4.443%. The weekly cycles are on clear sell signals following the double top at the year highs at 4.88%. Support from last week is at 4.41%, with resistance to 4.5%. Today's action looked and felt corrective against the weekly cycle downphase, but there's also support from last autumn down to the 4.2% level. This uncertainty is reflected in the narrow range since the drop two weeks' ago, and while the weekly oscillators suggest that it will break to the downside, treasury bulls have had a long wait so far.
There were no significant economic data released today, with the market news dominated by earnings reports, up- and downgrades.
Crude oil futures began the day strongly, scoping 5 week highs and trading above the widely-watched 40 level in the morning. Despite the Fed's dismissal of this year's commodity inflation as being fleeting, oil and the CRB have been returning to their previous highs. A story made the rounds concerning the impact of higher gasoline prices on WMT's clientele, stating the obvious point that consumers are feeling the pinch. Reuters reported that despite the high production accomplished by OPEC this year, strong demand has left little capacity to absorb supply problems. The article cited the problems at YUKOS, a strike in Nigeria, sabotage attacks in Iraq and fires in Norway. The promised 500,000 bpd increase in formal quotas by Saudi Arabia has done little quell rising prices. The article noted that OPEC has been producing above its official limits and that Saudi Arabia intends to hold production at 9.1M bpd, the third month at this high level. The $42 price seen earlier this year represented a 21 year high. A late session reversal pulled oil futures back below the 40 level to close 1.58% lower at 39.33, helped along by a more than 4.41% decline in natural gas futures.
It's an obvious point that high oil prices will put the squeeze on every level of the economy. Demand for oil is inelastic, for the most part, and higher prices mean that consumers and businesses have less to spend on everything else. Unsurprisingly, the decline in oil futures coincided with the upward spike in equities in the afternoon.
Over the weekend, the Wall Street Journal ran a story on the US budget deficit, discussing the well-worn but still-pertinent issue of the negative impact of deficits on the economy in general and taxpayers in particular. It also raised the spectre of a fall in foreign purchases of treasury debt. This issue strikes a chord as the US Dollar Index hangs at 5 month lows following the more than 25% decline since its high at the beginning of 2002. The following chart from the WSJ contextualizes the current budget deficit and the financing thereof:
Chart of WSJ Fiscal Picture
Against this backdrop was a general malaise for techs ahead of the INTC report due after the bell tomorrow. A NY Times story over the weekend highlighted what the author feels to be overly optimistic positioning by tech companies as reflected in the impressive year-over-year inventory builds taking place at Dell (61% y-o-y increase), Seagate (+60%), Foundry Networks (+48%), Cisco (+47%), TXN (+30%), Intel (+29%), Sun (+25%) and Micron (+21%). The point of the article was that demand is lagging far behind the supply being accumulated by these producers, making the industry vulnerable as a whole.
NVLS reported Q2 earnings of 37.M or 25 cents per share, missing estimates by a penny. Excluding charges associated with its of Angstron Systems, the company earned $43.9M or 29 cents per share. Sales rose 41.5% in Q2 to $338.2M from $239.1M in Q2 2003, beating estimates of $331.3M. The company cited strong demand in its press release. AMAT CEO Mike Splinter held forth at the Semicon West industry conference in San Francisco: "We aren't alarmed by any early indicators." Merrill Lynch was out with a downgrade for the semiconductor sector, stating that the stocks (over 30 of them) "offer no upside from current levels" and cited inventory builds as a major factor in contributing to its opinion. That view was countered by Bear Stearns, who said that despite pockets of weakness in the sector, it still maintains a favorable view of the sector.
Later in the session, the Semiconductor Equipment and Materials International Group announced that the leading chip equipment manufacturers surveyed in their most recent study anticipate a sales increase 63% to $36.2B in 2004. CEO Stanley Myers said that "The outlook is for growth to be sustained next year, although not at levels as high as this year. SEMI members generally believe the peak of this market cycle will occur in the second quarter of 2005." Out of the numerous conflicting signals as to the fundamentals, the market was the final arbiter with the PHLX semiconductor index (SOX) declining 2.21% to 441.18 for the day.
After the bell, LSI warned that its Q2 revenue would miss estimates due to "softer-than-anticipated demand for semiconductors in storage components and video game console markets." The company lowered estimates from 455M-470M to 448M.
Domino's Pizza, the largest pizza chain in the US, is set to price 24M shares tonight in the $15-$17 range in a bid to raise 408M for its IPO under ticker symbol DPZ on the NYSE.
A $54M settlement was reached in a sex discrimination suit between the U.S. Equal Employment Opportunity Commission (EEOC) and MWD filed on behalf of a class of female officers and women eligible for officer promotion in the firm's Institutional Equity Division. The settlement, made without admission of liability, includes at least $2M to fund diversity programs to enhance the compensation and promotional opportunities for female employees at MWD and $12M in payment of the original complainant, bond trader Allison Schieffelin. EEOC Chair Cari M. Dominguez said that "We are pleased that Morgan Stanley worked cooperatively with us to resolve this litigation. With this settlement, Morgan Stanley has taken an important leadership step in adopting progressive programs to promote diversity that should serve as a model for the financial services industry."
For tomorrow, we await the 8:30 release of the May trade balance estimated at -48.3B, and at 2PM the treasury budget estimated at 16.3B. The pace of earnings reports will pick up as well- INTC reports after the bell at 5:30PM, as does JNPR and JNJ, though the time of the release for JNJ has not been listed. With the Nasdaq printing as clear a bearish picture as the Dow's potentially bullish one, I'm keeping my mind open. I believe that the easy money has been made on the current leg of this decline. While the daily Dow is not printing buy signals here and gave bulls a beautiful doji, it did so on light volume. Nevertheless, I believe that in the short term bears are pressing their bets at these levels. The charts do not indicate that it's time to buy, but pressure is increasing with each downward tick. A break to new lows from here could get very ugly, and with earnings season ahead of us that's a distinct possibility. Until some clarity emerges, however, I counsel patience and caution. The weekly oscillators are uncertain and the daily charts are mixed. The worst trades are those that you enter in frustration after missing an entry. Don't force your positions and wait, if necessary, for the market to come to you. It's much easier to set a stop loss and manage a position when you've gotten a good entry, close to support or resistance. I believe that we're closer to daily support than resistance, but would personally prefer to wait until the oscillators are more certain.