— Game Theory, I turned Her Away
Our current position:
Modest Upside Bias, Market Vulnerable
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:
A spike in volume on the week came in to support the Bulls’ cause.
With broad market participation in the upside move, the technical picture for the S&P and Nasdaq appears promising.
But the complete technical picture is a bit more complicated as the Dow continues to form a bearish head-and-shoulders.
Looking at individual sector action: Energy remains king, Semiconductors and Broker Dealers are relative strength winners (though suspiciously sluggish for the week), and Banks are sagging under their major moving averages.
We are encouraged to see a strong number of new highs posted for the week.
And we take note that we could be at the beginning of sector rotation from Transportation and Defense into Health and Biotechnology.
And of course, the event of the week was Hurricane Katrina. Donations to the Red Cross may be made here: http://www.redcross.org/donate/donate.html
The tragedy of Katrina from a psychological perspective is immeasurable. From an economic standpoint, it will clearly take a toll. But from the market’s response – it is encouraging to see the event shaken off.
The speculation attributed to increased volume on the week comes from the perspective that the Fed will halt interest rate hikes to handle the economic damage of the hurricane.
How much there is to this speculation is not clear insofar as the extent of the damage and what the Fed will actually do.
As traders, we want to continue to monitor price and volume to better understand what kind of trend will take form. Perhaps Katrina’s impact will mark a significant juncture for the market – perhaps not. It’s too early.
Right now, energy prices are the biggest concern for the market. It is often the case when hysteria hits an investment vehicle, that it sucks in all available buying power, only to top out with nothing left to sustain it.
We continue to believe that higher energy prices are likely in the future, but whether it’s a straight trend up, or small and/or large cycles of booms and busts is an entirely different form of speculation.
We are always uncomfortable buying vehicles the general public is bullish on.
The fundamental picture for oil (which is NOT our area of expertise) has drawn fierce debate from some very smart cats, with very good track records.
Some smart folks such as economist Brian Wesbury see no crisis: http://research.claymore.com/docs/Oil%20Bubble%208-29-2005.pdf
While other smart folks such as super trader Jim Rogers have their sights on oil at over $100 per barrel: http://www.stuff.co.nz/stuff/0,2106,3390814a12,00.html
Our motto is to “trade what is, and not what should be.” Whatever may be the case with oil, we will be sure to take advantage of our technical setups and reel in profits while cutting losses short.
And we also adhere to our axiom of NO EXPECTATIONS. The market is a beast. Forming opinions can be a very dangerous habit when it comes to speculation.
The Dow Industrial Average ($INDU), +0.48%, continues to be the technically weakest of the major indexes as it trades below its 50 and 200-day averages in bearish head-and-shoulders fashion.
The S&P 500 ($SPX), +1.07%, made a solid move north, though closed the week just below its 50-day moving average. It’s still trend up here.
Nasdaq ($COMPQ), +0.96%, traded in step with S&P as it closed just below its 50-day average.
Russell 2000 ($RUT), +2.26%, sizzled for the week, and remains trend up with a close above its 50-day average.
Volume Indications: All of the major indexes share three days of accuulation and three days of distribution for the past two weeks. However, after weighing it all out, the buyers hold an edge over the sellers.
New Highs – New Lows showed solid strength to the upside during the past week. There was a significant increase in New Highs, while New Lows stagnated with the same numbers it has posted over the past three weeks.
The Advance/Decline Line broke free of a downtrend in an exhibition of bullishness. It remains in the lower portion of it range over the past years.
Investors Intelligence portrays money managers as 51.1% bullish and 27.3% bearish. We continue to perceive this as bearish as the crowd usually gets it wrong. Just when and where – we can’t say.
Key chart action for the week:
Charts courtesy of Stockcharts.com
The 10-year Note Holdr (TLT) traded higher for the fourth week in a row and is challenging the top of a two-year wide base.
The U.S. Dollar Index ($DXC) continues to deteriorate and is decisively below its 50-day moving average.
The Gold Miners Index ($XAU) pushed higher and is poised for a 6-month high.
The Dow Jones AIG Commodities Index ($DJAIG) soared to a new high and is challenging the opper portion of an upward channel.
Consumer Cyclicals ($CYC) and Consumer Staples ($CMR) both made upside progress for the week, with no clear winner in relative strength. The staples long consolidation give it he technical appearance of being the stronger sector.
The Semiconductor Index ($SOX) continued to consolidate for the week, though are technically bullish. We could argue that action here is a little disappointing considering the relative weakness against the overall market on the week. But what’s a week?
Banks ($BKX) attempted to make a stand, though are still trading in bearish head-and-shoulders formation.
Broker Dealers ($XBD) continued to consolidate in what is now a seven week range.
Retail ($RLX) continued to plunge for the third week in a row. The sector may find support around its 200-day average at the 440 level.
Internet stocks ($IIX) continue to behave sluggish, and are trading in a sloppy head-and-shoulders. Not much to go on here.
Software ($GSO) is taking shape. Increased relative strength could potentially move the sector clear of a down-trend. No forecast yet, just something to keep an eye on.
Healthcare ($HCX) was a big winner on the week. The sector is poised for new highs.
Biotech ($BTK) busted out to new highs. This will bode well for health.
REIT’s ($DJR) rebounded for the week. It’s still trend up here, though the technical picture is not as strong as it was a few weeks ago.
Homebuilders ($DJUSHB) made a stand at their key support, former breakout level.
Transportation ($TRAN) is sluggish with a close below its 50-day average.
Airlines ($XAL) turned down for the week and made a strong statement with a close below a lower trend line. The sector is at a critical level.
Defense ($DFX) sold off for the second week in a row.
Energy ($IXE) screamed to another new high.
Basic Materials ($A1BSC) remains caught arund the half way point of 3/05’s high and 5/05’s low.
Utilities ($UTY) hit a new all-time high.
The top 10 industry groups from the 6 month RS screen are:
- HEAVY CONSTRUCTION
- DRUG MANUFACTURERS OTH
- SEMICONDUCTOR-BROAD LI
- TECHNICAL SERVICES
- DRUG DELIVERY
- SEMICONDUCTR-MEMORY CH
- INTERNET SERVICE PROVI
- SEMICONDUCTOR EQUIP MA
What Was Important About Last Week
- Wal-Mart (WMT) reported same store sales up 3.3% in the month in Aug. 26, which was just short of Wall Street expectations.
- U.S. employers added 169,000 nonfarm jobs to payrolls in August. The unemployment rate fell to 4.9%, which is the lowest rate since before the Sept. 11, 2001.
- The U.S. poverty rate came in at 12.7% of the population last year. The rate has been trending up on a year over year basis.
- The U.S. GDP grew at a 3.3% annualized pace for the second-quarter. This is just slightly below expectations.
- It has been estimated that the cost of Katrina could hit $100 billion. There is speculation that the Fed will halt rate hikes in lieu of Katrina.
What We Are Watching For This Week:
Key earnings releases:
- MONDAY: Holiday
- TUESDAY: Shuffle Master, Inc. (SHFL).
- WEDNESDAY: Albertson’s (ABS), Comverse Technology (CMVT), Hovnanian Enterprises, Inc. (HOV).
- THURSDAY: America’s Car-Mart, Inc. (CRMT), Barr Pharmaceuticals, Inc. (BRL), Quiksilver (ZQK).
- FRIDAY: none
On the economic front we have potential market movers with:
- MONDAY: Holiday
- TUESDAY: ISM Services
- WEDNESDAY: Productivity-Rev., Fed’s Beige Book
- THURSDAY: Initial Claims, Wholesale Inventories, Consumer Credit,
- FRIDAY: Export Prices ex-ag., Import Prices ex-oil
- 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:
“Either you think, or else others have to think for you and take power from you, pervert and discipline your natural tastes, civilize and sterilize you. ” — F. Scott Fitzgerald