Heavy Selling Warns Bull

Oh oh-oh-oh-oh you wanna get it right sometimes
— Cold Play “How You See The World”

Market Bias:


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


Where We Are:

The Major Indexes inch further into new high territory.

Heavy selling volume in recent weeks, most notably on the Nasdaq, serves as a warning to our Bull.

Leadership stays intact as the majority of stocks are near 52-week highs.

Volume usually leads price, so should leadership begin to crumble, we’ll hoist our Red Flag.

In this holiday shortened week we may see end-of-the-month portfolio dressing push things higher. But this is also the month of May when stocks are supposed to perform their worst.

A record number of shorts piling on has contrarians bullish.

An excess amount of shorts may very well lead to a bearish capitulation scenario where excess buying marks a top.

We never like to be positioned where its popular, but even a large amount of short-sellers can be right sometimes.

Taking a look at the broader market:

Technically speaking:

The Dow Industrial Average

($INDU), %, posted a loss as it retreated from an all-time high.

The S&P 500

($SPX), %, also posted a loss as it retreated from an all-time high.


($COMPQ), %, ended the week with a slight lost after breaking out to a new high.

Russell 2000

($RUT), %, posted a gain for the week, though pulled back sharply from a new high.

Volume indications lean further into bearishness. Dow and S&P 500 tacked on two distribution days last week. The Nasdaq has had six distribution days in recent weeks.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The U.S. Dolar Index ($DXC) inched higher, though remains below its major MA’s.

The Gold & Silver Miners Index ($XAU) inched lower below its major MA’s.

The Consumer Index ($CMR) inched to a new high.

The Cyclical Index ($CYC) inched to a new high.

The Technology Index ($DJUSTC) hit a new high before pulling back sharply.

The Semiconductor ($SOX) declined sharply for the second week in a row.

The Software Index ($GSO) declined sharply after hitting a new high.

Telecom Index ($XTC) inched to a new high.

The Banking Index ($BKX) posted a modest loss as it holds a tight month-long price range.

The Broker Dealer Index ($XBD) remain poised in a bullish cup-and-handle pattern.

The Retail Index ($RLX) stays trapped in a two-month range, just under new highs, but not quite an ideal cup-and-handle pattern.

The Healthcare Index ($HCX) inched to a new high.

Biotechnology Index ($BKX) holds a month-long pullback formation.

Pharmaceutical Index ($DRG) hold a six-week trading range.

The REIT Index ($DJR) declined further below their major MA’s as they hit the support of a major trend line.

The Transportation Index ($TRAN) consolidates for the sixth week in a row.

The Airline Index ($XAL) consolidates below its major MA’s.

The Defense Index ($DFX) inched to a new high.

The Energy Index ($IXE) inched to a new high.

What Was Important About Last Week


  • Gap (GPS) reported Q1 (Apr) earnings of $0.25 per share, excluding non-recurring items, $0.01 better than the Reuters Estimates consensus of $0.24. Revenues rose 3.4% year/year to $3.56 bln vs the $3.47 bln consensus.
  • Network Appliance (NTAP) reported Q4 (Apr) non-GAAP earnings of $0.30 per share, in line with the First Call consensus of $0.30. Revenues rose 34.0% year/year to $801.2 mln vs the $798.1 mln consensus.


  • Existing home sales declined 2.6% in April to an annual rate of 5.99 million, lower than the consensus expected level of 6.12 million and the lowest level since June 2003.Sales dropped in all four major regions, but in the Northeast more than anywhere else. Sales slowed for both single-family homes and condos/coops.
  • The median price of an existing home rose to $220,900 in April, but is still down 0.8% versus a year ago.
  • The months’ supply of existing homes (how many months it will take to clear the inventory of unsold homes at the current sales rate) rose to 8.4, mostly due to rising inventories although also partially due to the slower rate of sales.
  • New orders for durable goods increased 0.6% in April, less than the consensus expected increase of 1.0%. However, the March gain was revised up to 5.0% from 4.3%, putting the April level of orders above expectations. New orders excluding transportation gained 1.5% versus a consensus expected gain of 0.6%.The strength in new orders was spread among fabricated metals, primary metals, and electrical equipment/appliances/parts. After large gains last month, orders for industrial machinery and transportation equipment (particularly aircraft) pulled back some. When calculating business investment for the GDP accounts, the Commerce Department uses non-defense capital goods shipments excluding aircraft. That indicator increased 0.7% in April while the figure for March was revised up to 1.5% from a previous estimate of 0.8%.
  • Unfilled orders increased 1.8% in April and are up 19.8% versus a year ago, larger than any year-to-year increase from 1980 to 2005. Unfilled orders for non-defense capital goods excluding aircraft increased for the 30th straight month and are up 17.0% versus a year ago.

What We’re Looking For This Week

Key earnings releases:

  • MONDAY: none
  • TUESDAY: BMC Software (BMC), Vodafone Group PLC (VOD)
  • WEDNESDAY: Chico’s FAS, Inc. (CHS), Joy Global Inc. (JOYG), Polo Ralph Lauren Corporation (RL), TIVO INC (TIVO), Williams-Sonoma (WSM)
  • THURSDAY: Big Lots, Inc. (BIG), Ciena Corporation (CIEN), Dell, Inc. (DELL), Frontline Ltd. (FRO), H.J. Heinz Company (HNZ), Hovnanian Enterprises, Inc. (HOV), Sears Holdings Corp (SHLD), Tiffany & Co. (TIF), Wind River Systems (WIND)
  • FRIDAY: none

On the economic front we have potential market movers with:

  • MONDAY: none
  • TUESDAY: Consumer Confidence
  • WEDNESDAY: Crude Inventories, FOMC Minutes
  • THURSDAY: GDP-Prel., Chain DeflatorPrel., Initial Claims, Chicago PMI, Construction Spending, Help-Wanted Index
  • FRIDAY: Nonfarm Payrolls, Unemployment Rate, Hourly Earnings, Average Workweek, Personal Income, Personal Spending, Core PCE Inflation, ISM Index, Mich Sentiment-Rev., Pending Home Sales, Auto Sales, Truck Sales

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This Week’s Word On Discipline:

“The secret of success is constancy of purpose.” – Benjamin Disraeli