Here’s What The Bullish Side Of The Story Suggests
Last week was a
mixed performance for the key indexes, as we finally saw some consolidation
after the solid gains seen over the last 5 weeks. Part of the reason for
the lack of gains was continued warnings out of corporate America. And it
wasn’t only technology, as Office Depot and Coca-Cola also issued fairly severe
warnings. Nonetheless, the warnings did not do much damage to the overall
market. The most important story of the week was the continued rally in
bonds (as yields declined), which are now causing many to question the
sustainability of the economic recovery. The 10-yr note recorded a new
multi-month high on Thursday, which normally has negative implications for
economic growth.Â
The December SP
500 futures closed out the week with a gain of +5.00 points, while the Dow
futures slipped -18 points. On a weekly basis, nothing has really changed
as the down channel is still intact. Looking at the daily chart, the ES
continues to climb the Summer rebound uptrend line up into the longer term
downtrend line. A close back above 1130 is needed to break long again on the
daily 3-Line Break chart. The YM posted its 2nd weekly doji in a row and
is pinned under weekly and daily downtrend line resistance. In the small-caps,
the ER2 is also climbing its Summer uptrend line into its longer-term downtrend
line.
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The Banking
Index (BKX) continues to hold both weekly and daily bearish Gartley patterns,
but is trying to form a base off of its 10-day MA. The SOX broke its
weekly wedge, but posted a doji for the week.
With just
over 3 months left in 2004, the equity markets appear to be at another critical
crossroads. Five weeks ago, there was a growing sense of pessimism about
stocks and the economy. However, the current rally has gone a long way
towards restoring confidence in equities, not to mention a general sense of
optimism that economic growth will pick up. We have seen some minor
stabilization in the economic data, but the negative news on the earnings front
has yet to let-up. More to the point, crude oil still sits north of $45.00
per barrel, which can’t be positive for global economic growth. With those
elements in line, it’s difficult to make a case that the current rally is
anything more than a sharp counter-trend rally, which served more to work off
the deep oversold condition seen during the summer than anything
else.
The bullish
side to the story suggests that we are now at a key inflection point with regard
to the economy and corporate profits. Those optimistic on equities for the
next several months believe the worst has already been priced into stocks and
the economy, as more robust growth should resume in the months ahead. My
problem with this view is simply the lack of catalysts I see to trigger a sharp
rebound in profit and economic growth. On the contrary, from everything
I’ve seen, consumer spending continues to deteriorate. To top things off,
the long-expected awakening of corporate spending has yet to really materialize
in any significant manner.
Looking at this
week, the focus shifts again to Greenspan and Co., as they meet for another
expected rate hike on Tuesday. Otherwise, the economic calendar is pretty
quiet, with August Leading Indicators on Thursday and Durable Orders on
Friday.
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Program Trading Levels
Fair Value – 0.16Â Â Â
Buy Program Premium – 1.17
Sell Program Discount – (0.89)
Closing Premium – 0.45
Closing Bias – If the futures gap down at the open,
watch for a retracement up towards the gap fill.
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Please feel free to email me with any questions you
might have, and have a great trading week!
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