- Where We Are
- What Was Important About Last Week
- What We Are Watching For This Week
- A Word On Discipline
Where We Are:
Taking a look at the overall markets:
Nearly every sector posted a loss for the week as institutional strength selling pounded the markets.
Our leadership in Energy appears top-like, as a high volume turn around from new highs suggests a punctuation to a power move that has occurred over the past two years.
Bearish comments from a Federal Reserve president are attributed to the market’s slide. We’re not always so quick to trade news releases, though unless the market can prove otherwise, inflation appears to be a legitimate concern for market players.
Banks have been trading in bearish technical fashion for the past few months, and are poised to fall apart, and potentially lead broad market price action lower.
The Technology sector is giving no clear directional signal, though if recent consolidation in the Semiconductors is successfully broken to the upside it will be encouraging for the broader markets.
Broker Dealers continue to possess relative strength, and have not shown any signs of significant trouble. This is encouraging as BD’s hold weight insofar as overall market sentiment.
Bearish trends in volume patterns, Highs and Lows, Investor’s Intelligence, and The Vix continue to warn of a market due to correct.
We could subjectively say the market has already corrected, so we now ask – will the correction resolve itself? … or will it turn into a new bear market?
We make no claims to know what the market will do, and make a point in never taking seriously those who do.
Our mission is to measure the market environment for its friendliness to specific industry groups, and play individual stocks in accordance to our rules.
Recent strength in Energy and Materials is characteristic of a bull market at the end of the road.
Wherever Technology trends, so usually does the broader market.
Because we are not seeing anything setting up from ideal Technology sector Growth Stocks, we cannot be surprised if the market fails to produce anything worth buying for some time.
Gold Miners have broken out of a two year base, and may offer setups in the near future.
The Dow Industrial Average ($INDU), -2.62%, has formed a bearish head and shoulders pattern and is testing its neckline. Obvious technical patterns have a history of frustrating those who trade them.
The S&P 500 ($SPX), -2.68%, has formed a third bottom at an upward trend line. A break below 1181 would likely trigger further selling.
Nasdaq ($COMPQ), -2.85%, is triangled for the year, and trading at the support level of its 200-day moving average. Triangles tend to frustrate traders playing either side of the market.
Russell 2000 ($RUT), -3.51%, is trading at the support of its 200-day moving average. The index maintains relative strength over the other majors, with no clear technical indications.
Volume indications marked heavy seller dominance for the week. The scale is unarguably tipped to the Bears.
New Highs – New Lows dipped to lows not seen since the Spring. We’re touching into negative territory.
Investors Intelligence portrays bullish dominance with the number of Bulls over 49% and the number of Bears over 27%. This contrarian indicator has suggested a correction due for the past several months.
Key chart action for the week:
Charts courtesy of Stockcharts.com
The 20+-year Note Holdr (TLT), broke south of an upward trend line, though left a bullish tail in the process. Bonds tend to turn before stocks, and from this perspective, poor performance from bonds over the last six months could be a precursor to lower stock prices.
The U.S. Dollar Index ($USD) is in a potential lower base. Breakouts from lower bases are challenged with overhead resistance.
The Gold Miners Index ($XAU), is maintaining ground after breaking out of a two year base. The sector is poised for further upside and may provide buying opportunities given the proper setups from individual stocks.
The Dow Jones AIG Commodity Index ($DJAIG) pulled back after soaring to new highs last week. This is a relative strength winner over the past couple of months.
Consumer Staples ($CMR), maintain a tight year long trading range, and hold the relative strength edge over the Consumer Cyclicals ($CYC) which are testing the neckline of a head and shoulders pattern.
Technology ($DJUSTC) dipped below a very tight three month range. Recent consolidation was encouraging, though no breakout means no upside potential.
The Semiconductor Index ($SOX) have been oscillating in a three month range. No directional signal in place.
Banks ($BKX) dipped below a head and shoulders neckline. Another break below 94 may trigger further selling. This has been a weak area for the market, and may lead the action down for the entire market.
Broker Dealers ($XBD) remain strong as they experienced relatively light selling vs. the broader market.
Retail ($RLX) has been trend down for two months.
Internet ($IIX) scratched a new 9-month high, though has no solid bias insofar as technical analysis.
Healthcare ($HCX) broke out to a bull trap as recent selling wrecked its uptrend. This is a bad sign for bulls.
Biotech ($BTK) broke out to a new high though reversed a bullish signal with a high volume turn around.
REIT’s ($DJR) have been trend down for the past two months.
Homebuilders ($DJUSHB) have also been trend down for the past two months.
Transportation ($TRAN) is trendless while tangled in its major moving averages.
Airlines ($XAL) has traded back to a long term trend line that served as support before the bottom fell out for the sector.
Defense ($DFX) hit a new high, though faces a potential bull trap situation if price action drops further below its 50-day moving average.
Energy ($IXE) was hammered in a high volume wash out that often goes in hand with tops. What kind of top, is difficult to say, though we believe it will be some time before new highs are notched in again.
Utilities ($UTY) hit a new high, though reversed course to close the week with a loss as a monthly low was achieved.
The top 10 industry groups from the 6 month RS screen are:
- SEMICONDUCTR-MEMORY CH
- DRUG MANUFACTURERS OTH
- DRUG DELIVERY
- HEAVY CONSTRUCTION
- INTERNET SERVICE PROVI
- INDUSTRIAL EQUIP WHOLE
- HEALTHCARE INFO SVCS
- INVESTMNT BROKERAGE-NA
- SEMICONDUCTOR-BROAD LI
What Was Important About Last Week
General Motors (GM) and Ford (F) were put on Standard & Poor’s CreditWatch.
Clorox (CLX) said high energy prices would
restrain profits in its fiscal second quarter.
BP (BP) said the shutdown in productivity from the hurricanes
would reduce third quarter profits by about $700 million.
Lexmark (LXK) reduced its third-quarter profit estimates by half due to an
unexpected drop in revenue.
General Electric (GE) raised its
profit forecast for the rest of the year.
Major U.S. retailers reported mediocre September sales growth, citing
hurricanes and high gasoline prices as negative influences on consumer spending.
- Dallas Fed President Richard Fisher spooked stocks with the comment, “The
inflation rate is near the upper end of the Fed’s tolerance zone, and
shows little inclination to go in the other direction.”
- Nonfarm Payrolls outside fell by 35,000 last month, the first decline since May
- The unemployment rate, rose to 5.1%, the highest in four months, though better than expected.
- U.S. factory orders rose 2.5% in August for the third gain in four months. This was better than economists’ expectations.
Key earnings releases:
- MONDAY: ALCOA Inc (AA), Genentech, Inc. (DNA).
- TUESDAY: Advanced Micro Devices (AMD), Apple Computer, Inc. (AAPL).
- WEDNESDAY: Fastenal (FAST), Monsanto Company (MON),
- THURSDAY: Fairchild Semiconductor International, Inc. (FCS), Tribune (TRB), Winnebago (WGO).
- FRIDAY: General Electric (GE), Knight Ridder (KRI), UnitedHealth Group Inc. (UNH).
On the economic front we have potential market movers with:
- MONDAY: none
- TUESDAY: FOMC Minutes.
- WEDNESDAY: Crude Inventories.
- THURSDAY: Export Prices ex-ag., Import Prices ex-oil, Initial Claims, Trade Balance, Treasury Budget.
- FRIDAY: Core CPI, CPI, Retail Sales, Retail Sales ex-auto, Capacity Utilization, Industrial Production, Mich Sentiment-Prel., Business Inventories.
- The Growth Stock Landscape
- What We Like – What We Have
- This Week’s Scans: • SETUPS • BREAKOUTS • BASE BUILDING • SHORTS
This Week’s Word On Discipline: