Somewhere in the ancient, mystic trinity, you get three as a magic number.
The past and the present and the future,
Faith hope and charity,
The heart and the brain and the body,
Give you three as a magic number.
— Jeff Buckley, Three Is A Magic Number
Our current position:
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:
Taking a look at the overall markets:
The market does whatever it wants, whenever it wants.
We won’t make any claims to whether or not our little bull market off the 2003 lows is over, but what we can say is that this market is weak.
With further deterioration in price action on the major indexes, we have confirming volume indications illustrating seller dominance.
Price and volume are all we need to tell us not to buy into this market.
We won’t guess where the downside ends, but what this market has going for right now is the fact that volume in general has been on the light side.
Where, or if, institutional muscle decides to step in and defend the long side is an X-factor.
Going forward, we’re looking to see what sectors hold up, fall a part, or consolidate.
Relatively strong pockets in the market can be found in the semiconductors, broker dealers, and energy. We place a lot of weight in the success of the semis and BD’s as overall market strength correlates positively with them. If the semis should breakout to new highs they will still face significant overhead resistance.
Weakness in banks continues to be a clear concern for the overall market.
Recent selling in retail and homebuilders has led the action down, and has shown no signs of turn around.
We also take note of the fact that the S&P 500, Nasdaq, and Russell 2000 have made a distinct three drives higher in moves off the 2003 lows. Three moves in a direction has served as a profound statement throughout the history of the market. It marks significant tops and bottoms, and it also makes a strong statement when the pattern doesn’t hold.
Just as the stock market has carved out three humps, oil traders note that the price of crude has demonstrated unusual strength by taking out its three drives to the upside. Look at the weekly chart from to 2004 to observe this.
We do not use this observation as an invitation to go short, but as an undertone for what might be in the works.
The Dow Industrial Average ($INDU), -1.53%, is now trading below its 50 and 200 day moving averages and is in the process of forming a bearish right shoulder.
The S&P 500 ($SPX), -1.20%, slipped below its 50-day moving average, though remains above its 200-day average. The index has made an ominous three moves since rallying off it 2003 lows.
Nasdaq ($COMPQ), -0.69%, is also trading below its 50-day moving average and has made triple top.
Russell 2000 ($RUT), -0.59%, is trading below its 50-day average and above its 200-day average. The index has made a similar three drives higher with the S&P 500.
Volume in general has been light, though what must not be ignored is the three days of distribution apiece for the major indexes over the past two weeks. Three or four distribution days within two weeks goes in hand with a weak market environment that may lead to further selling.
New Highs – New Lows established bearish divergence to the major indexes several weeks ago as the indicator failed to keep pace with the market to the upside. The number of New Lows has gradually picked up the pace over the past two weeks as the number of New Highs tapered off.
The Advance/Decline Line kept trend with the overall market for the week, and is confirming a weak market.
Investors Intelligence continues to report a large number of money managers as bullish, which is considered a bad sign. This report tends to express the opinions of the wrong way crowd.
The VIX continues to move higher as it reflects heightened fear among OEX options traders.
Key chart action for the week:
Charts courtesy of Stockcharts.com
The 10-year Note Holdr (TLT) cruised above its 50-day moving average as it holds an upward channel towards new highs for the year.
The U.S. Dollar Index ($DXC) and the The Gold Miners Index ($XAU) both lost ground for the week. These two vehicles typically trade inversely to one another, as the Dollar Index is trading within a two year lower base, and the Miners half way between the year’s lows and two year’s ago high.
The Dow Jones AIG Commodity Index ($DJAIG) is now consolidating just below the year’s high, and poised to breakout again.
Consumer Cyclicals ($CYC) and Consumer Staples ($CMR) both lost ground for the week, as the Staples maintain a base formation, and the Cyclicals technically weaker a lower low has been cut into its price action.
The Semiconductor Index ($SOX) has been more resilient to market downside pressure, and is trading above its 50-day and 200-day averages. If the index should breakout to new highs it faces a heavy resistance level at the 500 level.
Banks ($BKX) have been hit with heavy selling and continue to form a right shoulder,
Broker Dealers ($XBD) continue to exhibit relative strength in the market, as the index pulled back slightly and continues to trade above its 50-day and 200-day averages.
Retail ($RLX) traded lower for the third week in a row and has erased gains made since breaking out to new highs seven weeks ago.
Internet stocks ($IIX) continued to slide and are also forming a bearish right shoulder.
Healthcare ($HCX) took it on the chin with the rest of the market and moved below its 50-day average. The index has turned bearish as it pierced the lower line of an upward channel.
Biotech ($BTK) is consolidating just below the years high. The index is technically bullish.
REIT’s ($DJR) were little changed for the week, though have established technical weakness as its 50-day average now serves as resistance.
Homebuilders ($DJUSHB) continued to slide lower, as the index is parked on key support at its recent breakout level.
Transportation ($TRAN) moved lower with the overall market, and trying to establish support on its 50-day moving average.
Airlines ($XAL) continue to consolidate in a potential lower base.
Defense ($DFX) continued to demonstrate its relative strength with only a modesxt decline for the week.
Energy ($IXE) lost only slight ground for the week as it trades in pullback mode.
Basic Materials ($A1BSC) is now trading below its 50-day and 200-day averages as it formed a bearish lower low in its price action for the year.
Utilities ($UTY) bucked the overall market trend and moved modestly higher for the week.
The top 10 industry groups from the 6 month RS screen are:
- INTERNET INFO PROVIDER
- HEALTHCARE INFO SVCS
- DATA STORAGE DEVICES
- DRUG MANUFACTURERS OTH
- DEPARTMENT STORES
- HEAVY CONSTRUCTION
- SEMICONDUCTOR EQUIP MA
- TECHNICAL SERVICES
What Was Important About Last Week
- There was little in the way of earnings related news to report for the week, and certainly no market movers. This is typical of late summer.
- U.S. home sales fell 2.6% for July, to an annualized rate of 7.16 million units. This was a bigger drop than what economists were looking for.
- New home sales were up 6.5% in July, beating economists expectations.
- Durable goods orders fell 4.9% in July, for the biggest drop in 18 months. This is worse than what economists were looking for.
- The price of crude oil hit a new high of $68 per barrel.
- The University of Michigan’s consumer sentiment index fell to 89.1 in August, a steep decline from July’s 96.5 reading, and worse than economists expected.
What We Are Watching For This Week:
Key earnings releases:
- MONDAY: Joy Global Inc. (JOYG).
- TUESDAY: FuelCell Energy, Inc. (FCEL).
- WEDNESDAY: Tiffany & Co. (TIF).
- THURSDAY: Ciena Corporation (CIEN), Corinthian Colleges (COCO), H&R Block, Inc. (HRB).
- FRIDAY: none
On the economic front we have potential market movers with:
- MONDAY: none
- TUESDAY: Consumer Confidence, Factory Orders, FOMC Minutes
- WEDNESDAY: Chain Deflator-Prel., GDP-Prel., Chicago PMI
- THURSDAY: Auto Sales, Truck Sales, Initial Claims, Personal Income, Personal Spending, Construction Spending, ISM Index.
- FRIDAY: Average Workweek, Hourly Earnings, Nonfarm Payrolls, Unemployment Rate.
- The Growth Stock Landscape
- What We Like – What We Have
- This Week’s Scans:
• BASE BUILDING
This Week’s Word On Discipline:
“I think the guys who are really controlling their emotions … are going to win.” — Tiger Woods