Market Does A 180 — Here’s What I Mean
The dominant theme in the equity markets last week was
the weakness seen in the Tech sector, with the NASDAQ Composite
dropping roughly 3.5%. The main catalyst behind the weakness was Intel, which
lowered its gross margin goals and also suggested they have an unusually high
level of inventory on hand. It should also be noted that there were similar
comments made by tech companies such as Nokia and KLA-Tencor. Blue chip shares
did fare better, but still could not overcome the severe selling pressure in the
techs. Overall breadth was not as bad as I would expect, given the damage we
saw. Volume did expand over the previous week, which suggests further
distribution was taking place.
The
September SP 500 futures closed Friday’s session with a loss of -0.75 point, and
finished lower for the 3rd week in a row with a loss of -10.00 points. The Dow
futures tacked on 7 points, but lost 65 points for the week. On a weekly basis,
the ES continues to hold its downtrend and settled below its 40-week MA at 1106.
Looking at the daily chart, the ES posted a new low for the week, but was able
to hold its 200-day MA at 1102.50. The YM also continues to hold its weekly
downtrend, but was able to hold its 10-week and 40-week MAs. In the small caps,
the Russell E-mini (ER2) broke its 10-week and 40-week MAs, as well as the 50%
retracement of its May-June up move.
               
September
bonds (ZB) posted the 5th week of gains out of the last 6 weeks and face
resistance now at the 62% Fib retracement of the year’s decline at 109.28. The
Semiconductor Index (SOX) is testing the lower end of its weekly down channel
and 50% Fib retracement support, and is forming both a weekly and a daily AB=CD
pattern with a reversal point in the 401 area.Â
               
In three
weeks time, market conditions have done a complete 180-degree turn. Let’s not
forget, back in late June, market pundits were boasting daily about how few
profit warnings had transpired. Moreover, the common thought was that Q2
profits would significantly surprise to the upside, while robust guidance would
be provided. Well, here we are two weeks through earnings season, and the
complete opposite has taken place. It’s true that most of the weakness has been
isolated to the Tech and Retail sectors. But nonetheless, if we have learned
anything these last several years, it’s that tech is often a very good lead
indicator for the overall market. More to the point, despite analysts’ recent
comments about the rest of the market being fine, it’s very difficult for the
key indexes to hold up when Tech is acting so terribly. Unless the Tech sector
is able to stabilize soon, the current decline appears to be one that could end
in some sort of minor capitulation. To top things off right now, there is little
sign of fear, given the readings in various sentiment surveys, volatility
indexes, and options data.Â
Looking ahead this week, the
economic calendar is light so the focus will be on earnings, guidance, and more
earnings. Fed Chair Greenspan will also be babbling about monetary policy
before Senate and House Committees on Tuesday and Wednesday.
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Please feel free to email me with any questions
you might have, and have a great trading week!