What The Current Action Reminds Me Of
The equity markets had another rough week of trading, as the key
indexes all posted new lows for 2004 and leaving the SP 500 the only index that
hasn’t breached its 200-day MA. There wasn’t anything in particular to pinpoint
for the lackluster action, however, there were several continuing concerns among
market pundits, including fears over rising interest rates, surging energy
prices, a possible slowdown in China, and escalated tensions in Iraq. While the
damage was not too significant, it’s important to note that equities continue to
act poorly in the face of positive news.
The June SP 500 futures
closed Friday’s session with a gain of +1.00 point, and finished the 3rd
week in a row with a loss. Volume in the ES was estimated at 857,000 contracts,
slightly lighter than Thursday’s pace and right at the daily average. On a
weekly basis, the ES spun its wheels to post a doji. Looking at the daily
chart, the ES posted a spinning top after a 2nd failure at 10-day MA
and 38% Fib resistance.Â
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The Banking Index (BKX)
was able to squeak out a weekly market structure low, but is still pinned in a
bear flag by its 10-day MA. The Semiconductor Index (SOX) is holding its weekly
down channel and posted a bearish engulfing line after reversing at its 20-day
MA resistance and breaking its 10-day MA support. June bonds (ZB) posted a
weekly doji and a daily key reversal up after spiking below the October low,
however, a close back above the 10-day MA at 105.05 would signal that a low has
likely been posted. Â
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^next^
Currently, there is
little question that many sectors are stretched quite a bit to the downside.Â
Many short- term breadth-related oscillators are at levels that suggest a decent
buying opportunity. Also, the recent Put/Call data has indicated that put
buyers have been pretty aggressive. So that puts us at a “make or break†point.
The stage appears to be set for some sort of violent move to the upside in the
near-term, but, on the other hand, if we can’t get a bounce with decent volume
given the current backdrop, all bets are off.
Looking beyond the current
oversold condition, I’m not too thrilled by what I see. If you recall, in my
first update for 2004, I suggested that many longer-term problems still
existed. Those longer-term issues could start coming into play sooner rather
than later because much of the liquidity behind the 1-year bull market finally
appears to be exhausted. Not only have higher rates ended the mortgage
refinancing party, but it won’t be much longer before the last of the tax
refunds are mailed out. The comparisons for this past earnings season have been
pretty easy, given that during the same period a year ago the country was at
war. Moving forward, however, comparisons will become much more difficult,
which suggests that earnings growth rates may have already peaked for this
cycle. Corporations will also have to contend with very high energy prices,
leaving a reasonable possibility for some disappointment if companies have to
take down their aggressive estimates for the 2nd half of the year.
During the recent decline,
there has been almost a universal belief that this is simply a correction in a
bull market. While market players have become much more cautious, the consensus
still thinks that the economy and fundamentals are strong, and all is well. The
problem with this view is that the market is a forward-looking mechanism, not a
backward-(or current) looking one. Remember, a year ago the fundamentals were
weak, but stocks rallied because of anticipation over good news. The current
action reminds me a lot of 2000 when pundit after pundit would come on TV and
suggest that the fundamentals are still strong and what was being seen was just
a correction. Then they retreated back into their holes.
Looking ahead this week,
the economic calendar is fairly quiet, with the over-hyped Empire State Index on
Monday, and Leading Indicators and Philly Fed on Thursday. Also, on Monday,
we’ll find out which countries are buying U.S. Treasury bonds and stocks, as the
Treasury publishes its “international capital†data for March. Foreign buying
of U.S. debt helps keep interest rates low, so market players will be keen to
see the level of foreign investment.
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Please feel free to email me with any questions
you might have, and have a great trading week!
Chris Curran