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
Where We Are:
Taking a look at the overall markets:
The Nasdaq rallied to a 4-year high. Over the past few weeks we’ve watched money flow into technology and cyclical type stocks, this is the result.
What everyone wants to know is – will it last?
Our response is – who knows, who cares?
Our job as traders involves reacting to whatever the market dictates to us. We don’t “hold and hope”, or try to answer questions as if we were astrologers.
The strategy we use involves historically tested methods. We simply measure the market environment and place our bets accordingly. Energy spent ‘hoping’ and obsessing over ‘what ifs’ is just a waste.
Action this past week was mostly lackluster. While new highs were made, leadership continues to come from Energy and Homebuilders.
Our major indicators of price and volume continue to support the Green Flag we use to signify a buyer’s edge.
Our minor indicators of New Highs – New Lows, The Advance Decline Line, The VIX, and Investors Intelligence remain bearish.
The way we see things, either these bearish indicators will alter course to come in line with a market that moves higher, or continue to point down and serve as a bellwhether for lower price action.
While we see no major reasons to be bears, we also NOTHING worth buying at this juncture. We’re making money with positions established over the past months, and won’t get nervous until price and volume give their warning.
Inside the tape:
Most earnings reports for the second quarter have been great. Though interestingly, tech giants Microsoft, Intel, Google, and Yahoo have all had the wind knocked out them after not performing as well as hoped.
It’s not that the tech giants had poor earnings, it’s that the market wasn’t impressed. It’s not the news that’s important, so much as the reaction. Strong markets will reject negative news. Bad markets will decline on good news.
We could argue that the market as a whole didn’t seem to care about the earnings reports from its top names, but the fact remains that these top names are important, and they’re exhibiting weakness.
This week will be the climax of earnings reports, and we will be watching closely to see how the reactions come in line with the reports.
The major averages held relatively tight ranges for the week, and all are trading above their major moving averages:
The Dow Industrial Average ($INDU), +0.10%, is still technically the weakest of the averages, and settled in an indecisive “doji” candlestick chart formation.
The S&P 500 ($SPX), +0.47%, inched to another new 4-year high.
Nasdaq ($COMPQ), +1.06%, moved modestly higher for a 4-year high.
Russell 2000 ($RUT), +2.12%, edged out last week’s bearish candlestick for a new high.
Volume indications continue to portray a buyer dominated environment as the major averages notched in three days of accumulation a piece. Only the Nasdaq had one day of distribution.
The number of New Highs across the exchanges are NOT supporting new highs in the major averages. This is a clear sign of weakness. New Lows have held a steady and quiet pace with low numbers.
The Advance/Decline Line continues to show bearish divergence.
Investors Intelligence remains in a state of bearishness with too many bullish advisors.
Key chart action for the week:
Charts courtesy of Stockcharts.com
Consumer Cyclicals ($CYC) continue to work their way towards the year’s high as they outperform Consumer Staples ($CMR), which have been consolidating in base breakout fashion.
The Semiconductor Index ($SOX) continue to make their way towards the critical 500 level where a major trendline is in place.
Banks ($BKX) failed to make a new high for the week as the index works through overhead resistance.
Broker Dealers ($XBD) continue to blaze their way north to new highs.
Retail ($RLX) broke out to new highs.
Internet stocks ($IIX) remain sluggish and relatively weak, though not necessarily bearish.
Healthcare ($HCX) broke out to a new high before pulling back. The index is at a crucial juncture. To double top or breakout?, that is the question.
Biotech ($BTK) soared to new highs before pulling back to leave a bearish tail on the week. A nice and quiet pullback would be in the Bulls best interest, whereas high volume selling would be a red flag.
REIT’s ($DJR) failed to hit a new high though remain in a strong uptrend.
Homebuilders ($DJUSHB) hit a new high.
Transportation ($TRAN) broke its bearish chart formation, though remains in a year long trading range.
Airlines ($XAL) were quiet for the week.
Defense ($DFX) hit another new high.
Energy ($IXE) hit another new high.
Utilities ($UTY) pulled back for the week.
The top 10 industry groups from the 6 month RS screen are:
- GROCERY STORES
- SEMICONDUCTOR EQUIP MA
- SEMICONDUCTOR-BROAD LI
- TECHNICAL SERVICES
- RESIDENTIAL CONSTRUCTI
- DEPARTMENT STORES
- HEAVY CONSTRUCTION
- INTERNET INFO PROVIDER
What Was Important About Last Week
- Microsoft (MSFT) announced earnings of $3.7 billion for its fiscal fourth quarter, up 38% from a year ago, and ahead of Wall Street forecasts.
- IBM (IBM) announced earnings of $1.83 billion in the second quarter, up about 5% from a year ago, though revenue slid nearly 4% to $22.3 billion. The company easily beat Wall Street forecasts.
- Citibank’s (C) revenue slid 3% from a year ago to $20.17 billion, falling well below Wall Street expectations.
- Charles Schwab (SCH) reported a 65% jump in second-quarter earnings.
- No. 1 chip maker Intel (INTC) announced second-quarter earnings up16% to $2 billion, Sales were up 15% to $9.23 billion. The company beat estimates by a small margin, though the analystdisappointedpointed by profit margins and many felt the stock was over priced.
- Yahoo! (YHOO) said second-quarter earnings were six times as much as a year ago at $755 million, (due largely to the sale of an unidentified investment [GOOG?]. Revenue was up 51% to a record $1.25 billion, but the company still was short of Wall Street expectations.
- Merrill Lynch (MER) reported earnings were up 6% from a year ago to $1.14 billion, beating Wall Street expectations.
- GM (GM) lost $286 million in the second quarter, well short of Wall Street expectations.
- Ford (F) said second-quarter profits were down 19% from a year ago.
- Johnson & Johnson said second-quarter earnings were up almost 9% from a year ago to $2.68 billion, beating Wall Street expectations.
- EBay (EBAY) reported earnings of $291.6 million for the quarter, up 53% from a year ago. Sales were up 40% to $1.09 billion. Excluding one-time items, the company beat Wall Street estimates.
- Google (GOOG) said its second quarter earnings were $342 million, this is 5 times as much as a year ago and ahead of Wall Street estimates.
- AT&T (T) announced its second-quarter earnings tripled from a year ago. Excluding one-time items, the company beat Wall Street estimates. AT&T is wasiting to be acquired by SBC Communications.
- Kodak (K) said it lost $146 million in the second quarter, well short of Wall Street forecasts.
- Drug maker Merck (MRK) said its second quarter earnings fell 59% from a year ago.
- Shipping firm UPS (UPS) said its second quarter earnings rose 21%, though appears to be losing market share to FedEx.
- No. cell phone maker Nokia (NOK), reported its earnings rose 15% in the quarter.
- New U.S. home construction was stagnant in June.
- Building permits were up 2.4% in June.
- Greenspan said the U.S. is on “firm footing,” – with economic growth andinflation contained. He did not appear concerned over the impact of higher oil prices or a potential decline in housing.
- China’s economy grew 9.5% in the second quarter, well ahead of economists’ forecasts.
- New claims for unemployment benefits fell sharply last week to 303,000.
- The Conference Board announced said its index of leading economic indicators rose 0.9% in June after being flat in May.
- The Philadelphia Fed said its index of mid-Atlantic factory activity came in at 9.6 in July, a rebound.
What We Are Watching For This Week:
Key earnings releases:
- MONDAY: Altera Corporation (ALTR), BellSouth Corporation (BLS), j2 Global Communications (JCOM, Pitney Bowes Inc. (PBI), Texas Instruments (TXN), Xerox Corporation (XRX).
- TUESDAY: AFLAC Incorporated (AFL), Amazon.com, Inc. (AMZN), Biogen Idec Inc. (BIIB), Black & Decker Corporation (BDK), CHICAGO MERCANTILE HLDGS INC (CME), Electronic Arts (ERTS), Flextronics (FLEX), ImClone Systems Incorporated (IMCL), International Paper Co. (IP), LCA-Vision (LCAV), Lockheed Martin (LMT), RF Micro Devices, Inc. (RFMD), Southwestern Energy (SWN), United States Steel Corp. (X), Valero Energy Corp. (VLO), Websense (WBSN).
- WEDNESDAY: Agrium Inc. (AGU), Amerada Hess (AHC), Applebee’s International (APPB), ConocoPhillips (COP), Garmin Ltd. (GRMN), HCA (HCA), Internet Security Systems (ISSX), LSI Logic (LSI), Monster Worldwide (MNST), Pixelworks (PXLW), Placer Dome (PDG), Pulte Homes Inc. (PHM), Sprint Corp (FON), Starbucks (SBUX), The Boeing Company (BA), Ultra Petroleum Corp (UPL), WellPoint, Inc. (WLP), Xcel Energy (XEL).
- THURSDAY: Activision (ATVI), Aetna Inc. (AET), American International Group (AIG), Anglogold Ashanti Limited (AU), Apache Corporation (APA), Beazer Homes USA Inc. (BZH), Bristol-Myers Squibb (BMY), Celgene Corp. (CELG), Cognizant Technology Solutions (CTSH), DaimlerChrysler (DCX), ExxonMobil Corporation (XOM), Investment Technology Group (ITG), Invitrogen Corporation (IVGN), KLA-Tencor (KLAC), Marathon Oil Corporation (MRO), Nextel Partners (NXTP), Northrop Grumman (NOC), Patterson-UTI Energy, Inc. (PTEN), Penn National Gaming (PENN), Phelps Dodge (PD), Potash Corporation of Saskatchewan Inc. (POT), Raytheon (RTN), The Nasdaq Stock Market, Inc (NDAQ), Varian Semiconductor Equipment Associates Inc. (VSEA), Waste Management (WMI), Wendy’s International (WEN).
- FRIDAY: American Electric Power (AEP), Baker Hughes Incorporated (BHI), Chevron (CVX), Vornado Realty Trust (VNO),
On the economic front we have potential market movers with:
- MONDAY: Existing Home Sales
- TUESDAY: Consumer Confidence
- WEDNESDAY: Durable Orders, New Home Sales, Fed’s Beige Book
- THURSDAY: Initial Claims, Help-Wanted Index,
- FRIDAY: Chain Deflator-Adv., Employment Cost Index, GDP-Adv., Mich Sentiment-Rev., Chicago PMI
This Week’s Word On Discipline:
“On which side is discipline most rigorously enforced? …In which army is there the greater constancy both in reward and punishment? By means of these considerations I can forecast victory or defeat.” — Sun Tzu