Spreading violence in Iraq, an impending GDP revision and mixed global PMI helped to usher in a potential June swoon.

Wall Street veteran Art Cashin has been expecting, or at least preparing, for a lower week this week and today he reiterated that point. He mentioned how this week is historically a down week and today's price action does nothing to make me believe that may not be the case. Global markets were mixed in the overnight session in the face of positive PMI readings in China and Germany. Asian and European markets ended the day flat to mixed on signs of growth, just slowing or slowing growth. In China flash PMI was reported at 50.8, expansionary and above the expected 49.7 and the previous 49.4. In the EU German PMI was reported at 54.2, firmly expansionary but below last months 55.6 and the second month of declines. Other countries in the EU, France notably, sank deeper into decline.


Iraq was another factor in the early part of the trading day. More news of Isis taking over more towns and spreading it's influence throughout the region. Militants have also gained control of parts of the border along Jordan and Syria as well raising the threat of the violence spreading. Alongside that was other discussion of oil supply and how Iraq supply has not yet been impacted by the turmoil. Futures trading was flat to negative prior to the start of trading and held those levels going into the open. The SPX opened weak around -0.75 and then dropped to -2.75 in the first ten minutes. Support kicked in fairly quickly though, around the 1960 level, and sent the index up to poke into positive territory for a few minutes before moving back down to set a new intraday low. The back and forth at the open is a sign that traders are still indecisive about what this week will bring.

There is a fair amount of new data coming out but the bit in focus may be the GDP 3rd and final revision. Expectations are high the number will be revised even lower than last time. Current estimate stands at -1% with an expected drop to -1.8%. This revision will be important and could alter 2nd quarter and full year estimates. Afternoon trading saw the major indices trade in a tight range between the mid morning high and low into the close.


The economy

Only one piece of US data was released today, Existing Home sales. Sales increased by more than expected but not enough to significantly move the market. Sales increased by 4.9% to a rate of 4.89 million homes per year. The previous months data was revised up but sales are still down about 5% from last year. The median price of homes sold went up 1.5% and according to the report the “slow down is over”.

Tomorrow more housing data in the form of the Case-Shiller 20 city index and new home sales as well as consumer confidence. Wednesday Durable Goods and the GDP final revision lead into jobless claims, personal income & spending on Thursday and then Michigan Sentiment on Friday.

Moody's survey of business confidence administered by Mark Zandi remains positive. In his report he says that businesses are “stalwartly upbeat”. Businesses report that sales are still strong and that investment and hiring remain robust. He says that there are no signs of significant inflation as only a third of respondents have dad to raise end prices.

The Dollar Index

The dollar weakened slightly today but held above support and the 80 level. The index fell about a tenth of a point on very weak momentum and is now trading just above the mid point of the 8 month range. There are no central bank meetings for about 2 weeks so until then economic data will be driving dollar value. Iraq may have some impact if traders seek safe have currencies like the yen or the Swiss Franc.


The Gold Index

Gold prices held steady near the high set last week. Prices traded in a tight range just under the $1320 level and ended today's session up by a few dollars. $1320 looks like a potential resistance point for gold prices at this time. Short covering is likely to be over at this point leaving flight to safety holding up prices by it self. Regardless of the reason higher gold prices usually mean higher prices for gold stocks and that is what we saw today. The Gold Index advanced another +1% today on rising bullish indicators to halt just shy of a longer term resistance level. Momentum in gold stocks is positive now and on the rise so a test of this resistance is likely. Although rising, momentum is not very strong right now and stochastic is overbought in the near term so I'm not getting too bullish just yet. There is always the possibility that gold will get slammed again and that would not be good for the gold miners. In the longer term the index is showing some signs of bottoming around the $85 level so I would expect any decline to be met by support around the $95, $82.5, $80 and $85 levels.


The Oil Index

Oil prices opened at new highs today but quickly fell as traders weigh the news. Prices for WTI opened the day around $107 per barrel with Brent touching $115.50 before both fell during the session.The threat to Iraq oil is real and causing the rise in prices but the fear premium is being tempered by the counter reports explaining how Iraqi oil infrastructure is secure and not being impacted currently. The drop in prices after the open brought WTI beneath Friday's closing price but the decline was halted at $106. The Oil Index continued its march higher but it appears to be losing steam. The candles over the past few trading days have been getting smaller and smaller, one sign of a tired market. Momentum is still bullish so the index could keep going but there will probably be better entry points.


In The News

There are about 18 IPO's scheduled for this week. It's hard to nail down the number because there are at least 2 holdover's from last week and at least 14 for this week depending on which list you look at.

GE's offer to buy Alstom has had the last barricade removed but will result in slightly less earnings per share attributable to the purchase. GE is also selling part of its Capital Consumer Finance business to Banco Santander. Shares of GE fell more than 1% on the news falling just below the 30 day moving average in a move confirming longer term resistance.


Earnings season is just around the corner. Alcoa leads of the traditional start of the season on Tuesday July 8th. Today Micron Technology reported earnings after the bell and could be foreshadowing an earnings season of surprises. Micron reported earnings far above, well far enough anyway, analyst estimates moving the stock more than 1.5% in the after hours session. EPS of $0.79 beat estimates by nearly a dime on revenue that also beat by a fair margin. On a year over year basis Micron revenue has increased by over 71% on strong sales of its microprocessors.


The Indices

The Nasdaq Composite was today leader in terms of least amount of loss. The tech heavy index fell today after opening at the current all time intraday high. After a mild but choppy day of trading the index was able to just move into positive territory before the close. The Nasdaq has reached resistance at the 4,370 level as expected and looks as if a break through is not going to be easy. The indicators are bullish but highly divergent and consistent with the top of a range. A correction from this level will put the Nasdaq in position for a possible double top but that is still just a speculation. On the longer term weekly charts the indicators are bullish so this week may just be a test of resistance and support. The index has multiple support levels between the current level and the long term trend line which is about 9.5% lower than today's close. The GDP report on Wednesday and then the ever important upcoming earnings season could be the deciding factors on how low the index goes.


The SPX was today's runner up today and nearly made it back into the green before the close. The broad market traded just beneath the current all time high in a very tight range and low volume. The indicators are neutral to bullish in the near term with the chance of a small correction in the mix. Nearer term stochastic is overbought but longer term is low in the range and only in the process of rolling into bullishness. At this time the market appears to be sitting at a new high and waiting to “see what happens”. Maybe GDP will impress and the market can rally. Maybe Iraq will go away and the market can rally. Or maybe earnings outlook will weigh the market down with the help lower full year GDP expectations. In the near term support exists at the round number of 1950 and then just below that at the short term 30 day EMA around 1926.10 or -3.1%.


The Dow Industrial Average lost about -0.6% today on weak indicators. Momentum in the blue chip stocks is bullish but the peak is so small the chart doesn't even pick it up. Stochastic is in the midst of the weak trend following signal but % D is still pointing down so I don't put a lot of faith in that signal on by itself. The trend is still up and the index is making new highs but the near term is not looking real strong to me now. Support exists around 16,750 and 16,500 with a correction to my long term trend line equal to roughly 8.8%.


The Transports were the big loser today and no surprise as it has been the market leader for some time. The Trannies lost about a half percent and looks set to make a move lower. The indicators are firmly bearish hear, MACD in the red and ticking lower with today's candlestick. Stochastic is trending lower with both lines but %K is above %D so I'm not too worried about it yet. This could be setting up for another trend following move and bounce from the long term trend line which is about 5% below the current level. First support is along the short term moving average about 150 points lower.


There was a lot for the markets to consider today but again I think that the GDP revision will be the market mover of the week. If it's lower than expectations will it be blamed on the weather? Will the market believe it if it is and will it even matter? I think at this point we know the first quarter was weak, weaker than expected and weak enough to recalculate estimates. Will it matter if the revision costs us a tenth of a point or two or even three? The first quarter ended nearly three months ago. What is more important is the current quarter and how the rebound will be perceived. Did the rebound rebound enough? It's not a matter of how high 2nd quarter GDP is although higher is better, it is a matter of how much rebound we get from the first quarter. More rebound now means more economic momentum going into the summer, less is less and that is never good for the market. We'll find out on Wednesday but I think that whatever happens it will be another buy on the dip, however deep the dip goes.

And don't forget that next week is the end of the month and the next round of monthly jobs data.

Until then, remember the trend!

Thomas Hughes