A Fog Of Reason

Posted onAuthorGSRTrades

Traders,

The sun struggles up another beautiful day
And I felt glad in my own suspicious way
Despite the contradiction and confusion
Felt tragic without reason
There’s malice and there’s magic in every season
— Elvis Costello, The Other Side of Summer

Our current position:

BUYER’S EDGE INTACT

In this week’s edition you will find:
  • Where We Are
  • What Was Important About Last Week
  • What We Are Watching For This
  • Week A Word On Discipline

The following sections can now be found on our home site:

  • The Growth Stock Landscape
  • What We Like – What We Have
  • This Week’s Scans

Where We Are:

Taking a look at the overall markets:

This past week, like many weeks in the month of August, was marked by lighter volume and sluggish price action. Price and volume being our major indicators, we didn’t have much to go on.

In the bigger picture, our analysis methods continue to suggest the broader market is taking a rest before resuming its up trend.

Our methods have nothing to do with opinions.

Despite several minor signals that the market is due to correct, we have not witnessed heavy sellers step up with significant deterioration from key sectors. Until we see this, we’re going to keep our green flag hoisted in anticipation of new highs.

Strong market environments always have their worry areas, and we always take note of them. These areas could potentially lead to a market that deteriorates, but proof of that must be seen in the price action for us to take action.

Price pattern analysis portrays The S&P 500 and Nasdaq making an ominous three moves higher. Maybe it’s just a coincidence, but the market has tended to play out in threes throughout its history.

The Dow, S&P 100, and Nasdq 100 have failed to breakout to new highs with the major indexes. These stocks represent the biggest market caps in t he market.

The technical condition of the banking sector is bearish. A head and shoulders pattern on the weekly chart is a clear concern.

Retail stocks are in technical jeopardy after breaking out to new highs and falling back into its base.

Markets led by energy are often in their last stage of a cycle. But guessing just when that cycle is over is a game we won’t play.

New Highs – New Lows have shown significant bearish divergence over the past weeks. If market breadth won’t confirm new highs in the indexes, it indicates the indexes have not been well supported.

Investors Intelligence tells us a high number of money managers are bulls. This is historically bad.

The Volatility Index (VIX) is coming off historical lows. We look at the indicator from a historical perspective, not a swing trading one, and are believers that it will revert to its mean as fear and lower prices creep back into the market.

We have no idea what will happen in the next weeks, or months for that matter. August tends to be slow, but when the institutional money mangers return from their vacations we expect to get a stronger indication sentiment.

We always want to be on the side of the institutions. We do this by measuring volume, not their analysis. The last thing we want to do is take their professional advice, but the first thing we want is to be on the same side of the market as them. The two are not always the same.

This market may be sagging, but our portfolio remains in good shape.

Technically speaking:

The Dow Industrial Average ($INDU), -0.39%, and The S&P 500 ($SPX), -0.87%, consolidated for the week and are parked on their 50 day moving averages.

Nasdaq ($COMPQ), -0.99%, had an orderly decline and is also above its 50 day moving average.

Russell 2000 ($RUT), -1.13%, continued its slide and is just under its 50 day moving average.

Volume indications gave us no bias as all three of the major indexes shared one day of accumulation and one day of distribution.

New Highs – New Lows have portrayed a bearish environment over the past month, with the ratio failing to keep pace to the upside momentum of the major indexes.

The Advance/Decline Line showed bullish divergence for the week.

Investors Intelligence continues to give a bearish signal with the number of bullish money managers dominating the bears by a ratio of 2.55.

Key chart action for the week:


Charts courtesy of Stockcharts.com

The 10-year Note Holdr (TLT) made modest gains for the week as it holds withn its 15 month up trend.

The U.S. Dollar Index ($DXC) bounced back after 6 weeks of declines. The index is poised to breakout to a 15 month high. Whether or not such a move would stick will be critical from a technical perspective.

The Gold Miners Index ($XAU) lost ground and remain in technical limbo.

The Dow Jones AIG Commodity Index ($DJAIG) has pulled back after breaking out last week. The trend is up, but the instrument has little room on the downside before turning technically bearish.

Consumer Cyclicals ($CYC) were in better favor with traders than Consumer Staples ($CMR), with the prior in better position to make new highs.

The Semiconductor Index ($SOX) continued to pull back in orderly fashion. Next support zone will be the 50-day moving average in the 452 area.


Banks ($BKX) quietly edged up for the week, though hold a bearish technical pattern. Future action here will likely weigh in heavily for the overall market. Bulls are looking for a move above 101.98 which would negate a head and shoulders pattern in the works.


Broker Dealers ($XBD) have been holding up well during an overall market pullback.

Retail ($RLX) has sunk back into its base and is trading just below its 50-day moving average. While individual leaders from the group look as though they have topped, we won’t turn negative on the sector without a clearer move below the 50 day average.


Internet ($IIX) pulled back to its 50 day average and are in technical limbo.

Healthcare ($HCX) slid lower for the week and closed just below its 50-day average. The secotr is showing good relative strength against the overall market, though has not provided much clarity from a technical perspective.

Biotech ($BTK) puled back for the week though remains in an uptrend since breaking out 6 weeks ago.

REIT’s ($DJR) lost ground for the week and are trading below its 50-day average. From a technical perspective the index is on the cusp of turning from bullish to neutral. The 230 area will serve as a critical support decision.

Homebuilders ($DJUSHB) also moved lower, though remain in an upward channel.

Transportation ($TRAN) pulled back for the week with heavy distribution.

Airlines ($XAL) were positive on the week and continue to form what may later be recognized as a lower base.

Defense ($DFX) hit an all time high for the week.

Energy ($IXE) tumbled for the week. The sector has had a huge run up, with a heavy pullback not necessarily alarming.


Basis Materials ($A1BSC) traded lower for the week and is in technical limbo.

Utilities ($UTY) were little changed for the week and are trading just below the 50-day average.

The top 10 industry groups from the 6 month RS screen are:

What Was Important About Last Week

STOCKS:

  • Hewlett Packard (HPQ) said it earned 36 cents a share, as it beat a Wall Street’s consensus forecast of 31 cents.
  • The world’s biggest retailer, Wal-Mart Stores (WMT), reported disappointing second-quarter numbers and said it had a dim outlook going forward. High gasoline prices were thought to be hurting business.
  • The No. 2 U.S. home-improvement retailer, Home Depot (HD), posted second-quarter profits up 14%, as it beat forecasts. The company raised its earnings forecast for the year.
  • The No. 2 U.S. home-improvement retailer, Lowes (LOW) reported earnings up 20% in the quarter. This was better than Wall Street forecasts, and the company guided higher for the third-quarter.

ECONOMY:

  • The Labor Department’s consumer price index was up 0.5% in July, this is its biggest gain since April, and due largely to a 6.1% increase in gasoline prices.
  • The producer price index rose 1% in July, for the biggest gain since last October. This is double what economists expected.

What We Are Watching For This Week:

Key earnings releases:

  • MONDAY: none
  • TUESDAY: Williams-Sonoma (WSM)
  • WEDNESDAY: Dollar Tree Stores (DLTR), Michaels Stores (MIK), PetroChina Company Limited (PTR)
  • THURSDAY: Chico’s FAS, Inc. (CHS), Hormel Foods Corporation (HRL), Smithfield Foods (SFD), Toll Brothers (TOL)
  • FRIDAY: none

On the economic front we have potential market movers with:

The Following Sections Are Now On Our Home Site:

This Week’s Word On Discipline:

“Simulated disorder postulates perfect discipline; simulated fear postulates courage; simulated weakness postulates strength. “ — Lao Tzu