Market Stats

It's a fickle market. The stock market reacted negatively to the Fed announcement (or was it the accusation that the Fed's Bernanke might have strong-armed Bank of America to acquire Merrill Lynch?). Traders must have thought better of their selling, especially after Bernanke had an opportunity to state he acted with the "highest integrity" when it came to dealing with the MER acquisition, and traders decided to do some strong buying today. While the VIX may be dropping back down into a low-volatility range, price is displaying anything but low volatility. Monday's 28-point drop in the S&P was retraced at today's high. There is the potential for the market to extend its gains tomorrow (but will need to rally out of the gate to keep that potential alive).

Trading volume has been somewhat anemic this week, especially after Friday's strong volume. Today's volume was slightly more than yesterday's and on par with Tuesday's. Monday's selling volume was stronger than today's buying volume and that's of course the opposite of what the bulls would like to see.

This morning's economic reports certainly can't be credited with today's rally as the news was hardly good. I seriously doubt the market got totally excited over a 0.2% improvement in the final GDP number--it came in at -5.5% instead of the previously reported -5.7%. It's still a bad number and shows a serious contraction in the economy. I would hardly even throw that into the "less bad" category.

And the jobs picture was hardly inspiring--initial claims rose 15K to 627K from the previous week's revised number of 612K (revised higher by 7K from 605K). Economists were estimating 608K for the week so it was quite a bit more than had been expected. Continuing claims rose 29K to 6.74M people out of work. Expect this number to come down some as people drop off the end once their benefits expire.

This is just more evidence that the market does not move on news. News follows the market and people make up stories to help explain why the market did what it did. Why else would the market sell off following the Fed's announcement yesterday and then rally higher today? If the economic news was bad this morning why did the market rally? The market moves on human emotions and reacts more to herding behavior than we like to think of ourselves (after all, we're Thinking animals, not the herding kind). I'll continue to follow the price patterns to at least give me some clues as to what's next. That's hard enough but trying to figure out what the market might do based on news is an exercise in frustration.

Warren Buffet was out yesterday saying we haven't seen the worst yet. He said in an interview with CNBC, "Everything I see about the economy is that we have had no bounce. There were a lot of excesses to be wrung out and that process is still under way, and it looks to me that it will be under way for quite awhile. In the annual report, I said that the economy would be in shambles this year and probably well beyond, and I think that is true." Buffet obviously didn't get the green-shoot memo.

Buffet is one who believes the unemployment picture is more of a leading indicator this time around (as compared to previous less severe recessions). People have shifted from wanting to be in debt and buying what they want now to wanting to pay down debt and putting money into savings. As the unemployment picture worsens, and nearly everyone expects it to get worse before it gets better, people are nervous about their own jobs and trying desperately to get themselves into a better financial position, just in case. The continued drop in housing values, the biggest nut in a typical household's wealth, is making people feel poorer. Even after the March-June stock market rally it's down very significantly from its 2007 high. Therefore, as long as unemployment gets worse we're going to see continued pressure on consumer spending which will continue to put pressure on the economy.

Adding fuel to the bear's argument are some statements recently made by TrimTabs Investment Research. They made 4 points:
1. Retail investor is fully invested
2. Insiders are selling whatever they can.
3. Sideline cash has all been spent
4. We've seen the highest level of share issuances

1. Bullish enthusiasm is near an all-time high and that means those who are bullish the market are very likely already invested in it. Additional buying power is hard to come by when bullish sentiment reaches a high.

2. The fact that insiders are selling their stocks at a record pace, including more selling in the past couple of months than even at the 1999-2000 high and 2007 high, it should cause some concern about the green shoots theory. Insiders obviously don't see the little green shoots in their company and are deciding instead to take the money and run.

3. I must admit to being a little confused by their 3rd statement since I thought there was a lot of cash, particularly in those funds that have not participated in the rally off the March low (and have no desire to participate, believing it's just a big bear market rally). Perhaps those funds that are invested in the stock market have fully invested themselves and there's no more cash to help lift the market higher. In any case, TrimTabs believes the market has been "bought out".

4. Companies (not just banks) have recently issued far more shares of their stock (either through initial public offerings or secondary offerings) than they did even during the run up in the late 1990s and into the top in early 2000. From a contrarian perspective that will likely spell trouble for the market as it has historically tended to underperform in the periods following these record share issuances. Prior to May, according to TrimTabs, the highest level of share issuance in a given month was $38B but this past May blew that record out of the water, with a monthly total of $64B.

Along with bullish sentiment nearing bullish extremes (which is of course bearish from a contrarian perspective), bullish percents in topping territory and VIX back down to recent lows we have plenty of warnings about a potential market top forming. But that doesn't mean the market can't add on a few more points, especially as we head into the end of the month/quarter and into the typically bullish first few days of July (before the holiday weekend). In fact July 3rd has seen its share of market tops. Therefore there is a good possibility for a rally into the end of next week and if it's aided by short covering we could even see a blast to the upside (the one that would have me salivating to short). Anything is possible and neither side can take anything for granted here.

Since I mentioned VIX I thought I'd start off with its chart to show how it has dropped back down to recent lows. We may be seeing an ending pattern develop near the lows as bullish divergences hint of a reversal coming. Of course a bullish reversal in the VIX would be bearish for the stock market. If the market is able to rally a little further I suspect we'll see the VIX drop down to the bottom of its parallel down-channel from its January high, currently just below 23.

Volatility index, VIX, Daily chart

The small weekly candles on the SPX chart leaves us with little to go by in trying to determine the next move. Bullishly it looks like its sliding down the downtrend line from May 2008 and even shows a bullish hammer candlestick so far (depending on where it closes tomorrow). A rally into the end of the month could easily push it up to the Fib level near 985 and potentially even up to its broken uptrend line from 1990-2002. But the market needs to pretty much rally out of the gates tomorrow in order to keep the bullish pattern alive. Any drop back down below today's low would negate the bullish setup.

S&P 500, SPX, Weekly chart

Today's rally took SPX back up to its downtrend line from May 2008, which is where last Friday's rally stopped. So it's in the bull's best interest to see this rally continue. Another test and failure (kiss goodbye) would be bearish. MACD remains in bearish territory (below zero) while RSI has bounced back up for a potential test of the line that was support and is currently resistance. Again, the rally must continue from here in order to negate the bearish setup. The key levels of 927 to the upside and 888 to the downside are at least fairly tight so use them to gauge which way to trade the market.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 927
- bearish below 888

The decline from the June 11th high is a clear 3-wave move down. That's corrective and is another signal that we could get a rally to a new high from here. But as labeled in dark red, the bounce so far is also only a 3-wave move and that's potentially bearish. The combination of the 3-wave move down and the 3-wave bounce may be giving us a larger A-B-C pattern and as shown it points to a move down to at least 850 for wave C. A break below today's low near 896 would be a heads up that 888 will probably break. I hesitate to call a move above 922 (or 927) bullish because it might turn out to be just a higher bounce before heading lower but it would be bullish enough to suggest shorting the market is not the right idea. Just stay aware that we're in a corrective wave pattern and they're notoriously difficult to predict (and full of whipsaws like we've seen since the June high).

S&P 500, SPX, 60-min chart

The DOW has been the weaker index the past few days but it kept up today. Its 200-dma is only marginally higher near 8509 and that could make the 8500 area tough resistance. I show a move above 8600 as potentially bullish but watch for a retest of the bottom of the parallel up-channel shown on the chart, currently near 8700.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 8600
- bearish below 8260

The bounce off yesterday's low achieved a potentially important Fib level today and I wanted to show the setup on its 60-min chart. Yesterday's low for the DOW broken Tuesday's low, which was not matched by the other indexes. But they all got a strong bounce today and that's what makes for the potential a-b-c bounce off Tuesday's low. Because the DOW made a new low it would be expected to see the 2nd leg up for the bounce (wave c) achieve 162% of the 1st leg up. As shown on the chart that Fib projection is just shy of 8490. Today's high was 8490. That was the setup for a reversal and is one of the reasons why I'm saying we must see the rally continue tomorrow in order to break above 8500. Currently this is a bearish setup that the bulls need to overcome.

Dow Industrials, INDU, 60-min chart

NDX also stopped at potentially important resistance and is another reason why the rally must continue. If the retest of its broken uptrend line from March holds as resistance (kiss goodbye) it will set off some stronger selling. At the same time you can see that RSI is testing its broken uptrend line. It's a bearish setup at the moment and one the bulls need to negate quickly.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 1480
- bearish below 1413

Assuming the bulls can push the market a little higher I'm showing on the chart of the semiconductor index the possibility for a push up to test its broken uptrend line from March where it crosses its downtrend line from July 2007. They cross near 270 at the end of the month. So that's the short-term bullish potential and above 280 would be potentially a lot more bullish into July. Watch the downtrend line on RSI as it should break if there are some bullish things ahead, otherwise a test and failure at it would be a bearish setup.

Semiconductor index, SOX, Daily chart

Like the SOX I see some bullish potential for the RUT to make it back up to its broken uptrend line from March, up near 540 by the end of the month. It got a nice bounce off its 50 and 200-dma's where they crossed near 494. Obviously a drop below both moving averages at this point would be bearish.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 519
- bearish below 489

Bonds have been closely monitored as traders watch to see how the hundreds of billions of dollars being floated by the Treasury get bought up by the market. For the past 3 weeks we've seen a relief bounce in the bonds (yields dropping) and that's probably got the Fed and Treasury breathing a little easier. But I don't think they'll be breathing easier much longer.

The bounce in bond prices may be nearing an end soon as a correction to the decline. Looking at TLT, the 20+ Year Treasury ETF, the bounce off the low on June 11th (coinciding with the high for the stock market so it looks like a little reallocation going on) is approaching the level where it will achieve two equal legs up, which is at 95.88. Only slightly below that, closer to 95.00, is the broken uptrend line from June 2007. A retest and kiss goodbye against that trend line (or slightly higher to achieve 95.88) would obviously be bearish and it would point to lower lows for bonds (higher yields).

20+ Year Treasury ETF, TLT, Weekly chart

The banks may get some public attention they'd rather not have right now. Bernanke got to participate in a pre-July 4th weekend barbeque this morning, but unfortunately he was the one being grilled. The House Oversight and Government Reform committee challenged Bernanke about his involvement in the Bank of America buyout of Merrill Lynch. BAC's CEO, Ken Lewis, has been trying to defend himself by saying he was pressured to buy MER even after learning about Merrill's major losses. Lewis was supposedly told to buy MER or resign and the government would find some other patsy, I mean CEO, to take on the job. It's nice to know that Lewis valued his paycheck above integrity and moral character but I digress.

At issue here is trust. While the soap opera plays out between the sanctimonious players on all sides, the potential impact will be a blow to the confidence that the market has placed on the government, the Fed and Treasury in particular, to fix what ails us. If we lose trust in the Fed by finding out that they've been manipulating the market, banking activities and who stays on the job and who gets fired (say it isn't so!), and hid from public what was really going on, we will lose faith in the Fed's ability to get us out of the credit-contraction jam we're in. The government's role and responsibilities in the "free" capital markets could upset the trust many have placed in the Fed and Treasury. We might find out that the Fed is not larger than the market and the psychological impact could be significant. Stay tuned to the drama.

Speaking of hidden from public view, the banks are still playing their games as if nothing has changed. Actually for them very little has changed. They lost a lot of money, got reimbursed by the tax payer and now they're playing the same risky games that got them into trouble the first time. I can only imagine the public outrage if (when) they come back to the feeding trough to replace more money they've lost.

What's hidden from public view is all of the off-balance sheet assets the banks are holding. People don't challenge these things when stock prices are going up but when stocks prices are heading down and people are losing money they suddenly become very interested in why. If a loan that a bank is carrying off balance sheet suddenly defaults the bank must declare the loss. So if the off sheet loans create income or loss why shouldn't it be on the balance sheet? Because they're riskier loans and the banks don't want the public to see them (they show up as foot notes in their quarterly statements).

Banks, and the government, would prefer the public not know about the huge amount of bad loans off balance sheet (well in excess of $1T) since that could spook investors' confidence. But if and when the public does find out what a mess that still exists in the banks, and their risky behavior (still highly leveraged), tolerance will be minimal and confidence will be shot. Loss of confidence in a market is what causes a bear market and we are at risk of another leg down once all of this comes to light. So the saga between BAC's Ken Lewis and the Fed/Treasury is all part of the formula. Remember, the stock market rallies and declines on public sentiment, not on stock valuations or other fundamentals. News breaks with market moves and not the other way around (how many times have we heard the same bit of news cause two entirely different reactions in the market?).

So as we watch the banks for clues to what the stock market might be up to, today's BIX was rallying with the broader market but some of the telltale banks (JPM and BAC in particular) dropped into the red as the averages were achieving new daily highs today. I often say follow the money (the banks) and it's becoming more true every day now to follow JPM and BAC (it used to be follow Mother Merrill so maybe it's still showing through BAC).

But even the BIX gave us a clue today when it hit its downtrend line from June 15th and pulled back from there. But right at the end of the day, with 5 minutes to go and which looks highly suspicious of some manipulation, it punched through that downtrend line. Slightly higher is the downtrend line from May 8th, near 107 tomorrow morning and is the one shown on its daily chart. It's also very close to its 50-dma (although this moving average doesn't seem to be very useful). What's not quite clear yet, as I look at the daily chart, is whether the banks are pulling back in a bullish descending wedge pattern or if instead it's getting ready for a sharper drop. In either case, the price pattern looks like it needs at least one more pullback before it will potentially be ready to rally again (shown in pink).

Banking index, BIX, Daily chart

The home builders got a shot of adrenalin today and rallied nearly +6%. The support level from the early 2001 lows near 207 has been working well as support for the past month. But during this time of consolidation you can see how MACD has simply risen slowly back up towards the zero line. This is bearish and points to a break of support. I'm showing a little higher to test its 200-dma or 50-dma but this could break down at any time.

U.S. Home Construction Index, DJUSHB, Daily chart

I'm also showing a little higher bounce for the transports but that's just a guess from here. Like the broader averages the bounce might have finished today and start back down tomorrow. But we've got trend lines crossing near 3350 which is slightly above its 200-dma near 3320 so watch that area if we get a little more rally that then stalls.

Transportation Index, TRAN, Daily chart

Gold has been trying to bounce with the stock market but has so far stalled at its broken uptrend line from November (ignore the last white candle on the chart--it shouldn't be there). If gold can continue pushing higher it may turn into just a larger correction of the decline from the June high which is why I have the bullish key level up at 975--it needs to get above that level to increase the probability for new highs above 1000. In the meantime I expect gold to turn back down and eventually break below 850 (and lower).

Gold continuous contract, GC, Daily chart

Oil may have topped in its bounce off the February low but the pullback from its June high is so far just a 3-wave move and therefore potentially just a correction. That leaves open the possibility for another push higher to the Fib level at 76.77 that I've been eyeing for awhile. However, if the test of its uptrend line from April proves to be resistance (another kiss goodbye) I suspect we'll see stronger selling kick in.

Oil continuous contract, CL, Daily chart

Economic reports, summary and Key Trading Levels

I don't think we'll see any earth shattering news come out of tomorrow's economic reports and expect the market to essentially be on its own.

The market is at an important point as of the end of the day. As shown on the charts we've got a bearish setup for an immediate reversal and a break below this week's lows. But that has to happen with an immediate decline out of the gates tomorrow. Any sloppy sideways/down consolidation would indicate the market is consolidating for a move higher, probably with a rally into the end of next week (if not mid month where there are some cycle and historical studies pointing to a potential market turn).

The bearish potential, if hard selling starts tomorrow, is for a fast break lower. I could see that happening if there are a lot of fund managers hoping to hold onto this quarter's gains (for their end-of-month/quarter reports) who are then suddenly forced to start selling in order to protect profits. The wave pattern also suggests harder selling if we've got another leg down from the June high.

But if the bulls can keep the rally alive, even if it first takes a little more consolidation in the morning, then I can see lots of possibilities for some upside targets. We could get a relatively small rally to test some resistance levels below the June highs, or a test of the June highs. I also see the possibility for some short covering to kick in and give the market a real boost into the end of the month or middle of July. That's the kind of move that could get SPX up to the 985-1025 area as part of a blow-off finish (my MOAP setup).

Tomorrow should provide some important clues to help answer the question about what should happen next week. I'll provide my best guess on the live Market Monitor. Keep an eye on the key levels on the charts and play it accordingly. If we are in a topping process, as I believe we are, remember it's a process. Tops are choppy affairs with lots of whipsaws as the bulls and bears duke it out. They're not like bottoms which often get put in with a v-reversal (which by the way tend to be less reliable and are often retested). So trade lightly and take profits quickly since holding out for more can lead to a lot of frustration as you watch the market take your profits back.

Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- bullish above 927
- bearish below 888

Key Levels for DOW:
- bullish above 8600
- bearish below 8260

Key Levels for NDX:
- bullish above 1480
- bearish below 1413

Key Levels for RUT:
- bullish above 519
- bearish below 489

Keene H. Little, CMT
Chartered Market Technician