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Market Wrap

Make it a "light"

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The major indexes gave back some of last week's impressive gains on Monday in what could best be described as a "light" session of trade.

There were no major economic reports released for the U.S. today, and a light economic calendar this week begins Wednesday morning at 10:00 AM EDT with July existing home sales (consensus 6.6 million annual rate vs. previous 6.6 million annual rate).

Volumes at both major exchanges were anemic with many traders opting for the lounge chair at the vacation home after last week's active trade, where many of the major equity indexes broke above, or free of their August "Max Pain" Theory tabulations earlier in the week, then trended higher into Friday's close.

While the Semiconductor HOLDRs (AMEX:SMH) $32.54 -1.65% traded weak today, the battering this sector has taken since the beginning of the year had the most optimistic bull looking to guard some profits after last week's 8.2% gain.

Semiconductor HOLDRs (AMEX:SMH) - Daily Intervals

In recent Market Wraps that I've written, I've been showing the conventional use of fibonacci retracement from a relative high close to relative low close for various indexes.

In Tuesday's wrap, it looked like shorts, and ESPECIALLY call sellers got caught on the "wrong side" of the near-term trade and with arms and legs wrapped tight, gave themselves a big bear hug.

I think bulls will, or should, use that to their advantage near-term. Look for the SMH to pull in, show some stability from $31.28-$31.51, then look for 1/2 positions there, and add further on a move ABOVE the recent highs.

According to Dorsey/Wright and Associates, their Semiconductor Sector Bullish % (BPSEMI) has reversed up to "bull alert" status at 33% bullish after a recent low 24% measure. It would currently take a reversing lower measure of 26% to revert back to "bear confirmed" status, and a 68% reading to achieve "bull confirmed" status.

A complete list of various HOLDRs and their components/weightings can be found at http://www.holdrs.com

Patterson-UTI Energy (NASDAQ:PTEN) $27.64 +2.18%, Microsoft (NASDAQ:MSFT) $26.12 +1.27% and Expedia (NASDAQ:EXPE) $15.34 +1.05% were percentage gainers for the QQQQ, but couldn't offset negative breadth of 17:83 and losses of 3% or more for Akamai Technologies (NASDAQ:AKAM) $38.73 -3.12%, Urban Outfitters (NASDAQ:URBN) $16.54 -3.33%, Amazon.com (NASDAQ:AMZN) $28.13 -3.39%, Monster Worldwide (NASDAQ:MNST) $41.48 -3.51%, PETsMART (NASDAQ:PETM) $23.92 -3.47%, NVIDIA (NASDAQ:NVDA) $23.92 -3.47% and Broadcom (NASDAQ:BRCM) $28.89 -3.70%.

Earnings reports were also light on Monday.


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Shares of building products retailer Lowe's (NYSE:LOW) $28.35 -3.96% gapped back below both their 50-day SMA ($29.26) and curling higher 21-day SMA ($28.58) after the company missed Q2 estimates and cut its year forecast.

The number 2 home improvement retailer after Dow component Home Depot (NYSE:HD) $34.30 -1.35% reported earnings per share of $0.60 for the quarter, up from $0.52 a year earlier.

Analysts had forecast a profit of $0.61 a share.

Lowe's said sales rose 12.2% to $13.4 billion from $11.9 billion a year earlier. Analysts were expecting it to post revenue of $13.3 billion for the period.

Lowe's pared its full-year profit forecast to a range of $2 to $2.07 a share from May's projection of $2.07 to $2.11 a share and said they now see same-store sales for the year rising 2% to 3%, compared with May's forecast for a gain of 4% to 5%.

Company executives cited higher gasoline prices, as well as the slowing housing market as reasons for their more cautious outlook.

Despite strong gains in longer-dated Treasuries, which had the benchmark 10-year YIELD ($TNX.X) falling 1.6 basis points to 4.819% and the 30-year YIELD ($TYX.X) edging down 0.9 basis points to 4.964%, home builders as depicted by the DJUSHB closed down 18 points, or -2.90% on their curling higher 21-day SMA .

Today's economic calendar was void of any

The September Crude Oil futures (cl06u) will expire at Tuesday's close, where Middle East tensions helped provided a bounce from last week's decline. September Crude settled up $1.31, or +1.84% at $72.45, while October Crude Oil futures (cl06v) settled higher by $1.20, or +1.66% at $73.30.

Iran's supreme leader said Tehran will continue to pursue nuclear technology while refusing access to U.N inspectors wanting to examine its underground nuclear facility, accusing the U.S. of pressure despite assertions it isn't seeking nuclear weapons.

Just after today's close, the EIA said the average retail price for gasoline across the U.S. fell by 7.6 cents last week to $2.924 cents per gallon. September Unleaded futures (hu06u) settled down $0.0303, or -1.54% at $1.9366.

Miners got a nice bounce with the AMEX Gold Bugs Index ($HUI.X) 344.71 +5.37% jumping higher not only on the dollar's weakness, but the rebound in oil prices.

One item traders and investors will want to be alert to with the $HUI.X's strong bounce today is something I began alerting gold (commodity) traders to in Thursday's Market Monitor. I think longer-dated Treasury maturities are about to reverse course, and I'll discuss these thoughts, and possible dynamics below.

S&P Depository Receipts (AMEX:SPY) - Daily Intervals

Not unlike the SMH, or the QQQQ, or many equity-based indexes, we saw a notable rise into Friday's August expiration.

A "trap" a trader can fall into when they see a more "oversold" SMH/QQQQ rise quicker than what got the bull party started, is to try and turn more BEARISH the major index that sounded the trumpet for the bull's charge to begin.

"Financials" comprise the GREATEST weighting not only for the S&P 500, but also the SMALL CAPS and the Russell 2000 Index ($RUT.X).

Now, a low beta sector like the BIX.X and BKX.X, where many stocks there have a beta of about 0.30 to 0.50, a 5-dayNet% gain of 1.60% and 1.50% is nothing to sneeze at for a bull.

Beta is a measure of volatility, or systematic RISK, of a security or a portfolio in comparison to the market as a whole.

Let's say the SPX/SPY is representative of "the market" here in the U.S..

It would appear that the greater weighting of the banks starts to act like a damp cloth on the SPY and even the RUT.X, and with fed funds currently at 5.25% and the discount rate at 6.25%, it can be tough for banks (that make loans) to see much margin when the 5-year, 10-year and 30-year Treasury YIELDS are ALL below the above-mentioned fed funds and discount rate.

So why are the banks hanging in there with some nice gains considering there low beta relative to "the market?"

I think it is anticipation that we should start to see some "bond bulls" in the Treasury market start locking in gains, bring selling to the longer-dated maturities, and have their YIELDS start to rise and the benchmark bond 10-year YIELD ($TNX.X) has achieved, and now begins to exceed its bearish vertical count.

10-year YIELD ($TNX) Chart - 0.25 box size

I've always thought the "bond market" is much smarter, or educated about the "stock market" when it comes to the economy, and what the Fed is thinking, or may be doing in the future.

When the bond market "overdose" things, is usually when shorts get on the wrong side of things, and a momentum trade really unwinds.

The above chart is that of the 10-year YIELD, but I have, and would also alert traders/investors that the longest-dated 30-year YIELD ($TYX.X), which was down a more fractional 0.9 basis points at 4.965% today, would have its Point and Figure chart showing a bearish vertical count of 49.00, or 4.90%.

The bond market is SO MUCH MORE a RISK/REWARD trade than probably any other market we would encounter. Not just because of its size, which dwarfs equity markets, but because there is such a small window for error.

Think about it.

Trillions of dollars in a YIELD of, say 5%. Heck, the SPX/SPY has risen 6.25% in just the past month.

In Thursday's Market Monitor, it was my "gut feel" based on observations that gold was about to get a bounce, as TREASURY YIELDS were "overdone" to the downside, relative to where fed funds rates were at, combined with the 10-year YIELD ($TNX.X) achieving its bearish vertical count.

Yes! Perhaps I was a day early, but today's jump in the Amex Gold Bugs Index ($HUI.X) has the "equity" portion of the gold commodity getting a bounce, and I think this may lead to some SELLING in longer-dated Treasuries (that's where the risk in the bond market is at right now; LONGER-dated MATURITIES) where the RISK comes from the amount of TIME to MATURITY.

The Dollar's weakness gives us a signal too, that the Fed is closer to a "hold," or ease cycle than it is for raising rates.

But the "dynamic" I want to get across is the potential RISE in longer-dated Treasury YIELDS, that then adds some MARGIN, or spread back to banks that LEND MONEY.

How does an SPY/SPX pullback take place?

For the most part, stocks began their rebound not long after the recent FOMC meeting, and decision to hold the fed funds target at 5.25%.

YIELDS fall and Dollar weakens, and gold gives somewhat of a "mixed signal" and has been rather volatile on a session-to-session basis.

What I see taking place the next week is YIELDS start to rise, this builds some "fear" back onto the inflation side of things, and stocks ease back from their current rally.

However, the recent lackadaisical gains for banks, and perhaps "financials" in general, then ignite on the loan spread increasing from the rise in longer-dated maturities.

And that is where I think a BEAR that thinks "oh, short/put the SPY/SPX" as its rise from the June lows has played out, and now it has further to fall than the NDX/QQQQ" might be the BIG mistake.

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