Here’s What Market Internals Are Telling Me
The major equity indexes and index futures
finished mixed last week in what was a
mostly choppy first week of earnings season. Interest rate-sensitive shares
struggled because of the continued rise in bond yields, while strength was seen
in industrial blue chips. Technology shares were the worst performing group,
which likely had a lot to due with lackluster guidance by bellwethers such as
Intel, SanDisk, IBM, and Nokia. More to the point, as has been the case for
years now, tech shares are the group with the highest valuations, so they can
ill afford a misstep. Also making news was the continued rally in the U.S.
Dollar, due to strong economic data, as well as expectations of a Fed rate hike
down the road.Â
The June SP
500 futures closed Friday’s session with a gain of +9.00 points, but was unable
to pull off a gain for the week and finished it with a loss of —5.00 points.Â
Volume in the ES was estimated at 681,000 contracts, lighter than Thursday’s
heavy pace and just below the daily average. On a weekly basis, the contract
posted a spinning top, reflecting the current uncertainty in the market.Â
Looking at the daily chart, the ES reversed off of its 38% Fib retracement of
the recent up move, and was able to squeak out a close above its 50-day MA. On
an intraday basis, the 60-min and 30-min down channels were broken with room now
to retrace back to channel support at 1128.
                
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June bonds (ZB) broke the weekly uptrend line, but posted a daily
market structure low and has room to retrace back up to broken support around
the 110.05 area.
               
The U.S. Dollar fell under pressure after Friday’s economic news
and is showing some Stochs divergence just off of its 2-year downtrend line. The
Banking Index (BKX) posted a weekly bearish engulfing line, but posted a daily
market structure low with room up to its 100-day MA at 98.45.. The
Semiconductor Index (SOX) reversed off its weekly doji and took a bounce off of
its 200-day MA.
Given the
sharp increase in bond yields over the last 2 weeks, the key indexes have acted
better than most would have expected. However, the same is not true for market
internals, which have deteriorated quite a bit recently. Even when stripping
out “non-common shares,” which make up roughly 45% of the listed issues on the
NYSE, breadth has still been weak. In past experience, this has been a
precursor for weakness to come for the broad market. At the same time though,
these types of divergences can last for some time, as was the case of most of
1999 and early 2000, so don’t go shoring everything in sight just yet.
Where
does that leave us? It leaves us with a range-bound market with little
conviction available either way for a breakout of the current range. There is
simply too much uncertainty about the Fed, corporate profit growth, and economic
activity later this year for most to place any large bets. Also, the bullish
case does not have the large “short base” which was present in 2003. Without
the shorts in 2004, rallies have lacked the spark I would like to see during a
bull market.Â
Looking ahead this week, the focus will continue to be on corporate earnings (or
lack thereof), and while the amount of economic news will be light with Leading
Indicators on Monday and Durable Orders on Friday, the amount of “Fed-speak”
won’t be so light. On Wednesday, Fed Chair Greenspan will be talking about the
U.S. economic outlook before the Joint Economic Committee of Congress. There
will be plenty more rhetoric to digest on Thursday when Treasury Secretary Snow
and Fed Governor Bernanke speak at the Bond Market Association meeting in New
York.
Please feel free to email me with any questions
you might have, and have a great trading week!
Chris Curran