What The Recent Volume Drop-Off Suggests

June 7, 2004
Chris Curran

Stock index futures finished mixed in what was a rather
quiet holiday-shortened week of trading.Â Despite an abundance of
economic reports, market players lacked the conviction necessary to place any
large bets in either direction.Â The overall news flow was upbeat, as oil
experienced a sharp decline and the economic data continued to suggest positive
developments.Â In addition, chip bellwether Intel issued a solid mid-quarter
update, which implied that all the semiconductor bears might be overly
negative.Â Even with the positive backdrop, equities struggled to make much
headway to the upside.Â Perhaps the key indexes were consolidating their gains
from the prior week.Â Or, it’s also possible that most traders are unwilling to
do much before getting a clearer picture on what the Fed will do at the FOMC
meeting on June 30th.Â Overall, I found it difficult to draw any conclusions
from what took place last week.

The June SP
500 futures closed Fridayâ€™s session with a gain of +8.25 points, and finished
the week with a gain of +3.00 points.Â Volume in the ES was estimated at 623,000
contracts, slightly better than Thursdayâ€™s pace but still below the daily
average.Â On a weekly basis, the ES was able to hold its 10-week MA, but the
upside is still being capped by its broken weekly uptrend line now acting as
resistance.Â Looking at the daily chart, nothing has really changed as the ES
posted a doji at trend line, 100-day MA, and 62% Fib resistance.

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The U.S.
Dollar posted a key reversal down and is forming a bear flag at its 100-day MA
and 50% Fib retracement of this yearâ€™s rally.Â September bonds (ZB) posted a
weekly inside market structure high as they finished off the week with a close
just below the 20-day MA.Â The Semiconductor Index (SOX) rebounded a bit for a
daily market structure low but finished the week with a market structure high
right at its down channel resistance.

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The
recent drop-off in volume and the fact that the key indexes remain mired in a
congested pattern suggests to me that the usual summer lull hasnâ€™t waited for
July 4^th, and has already begun.Â Meanwhile, many market players
appear gun-shy to commit themselves because of the uncertainty over interest
rates, the price of crude oil, and economic growth in China.Â A year ago, there
were far more potential problems for the markets, but the market was able to
ignore them because strong economic growth was still ahead.Â Currently, we have
a market that trades near the high end of its historical valuation range, while
there appears to be a better than average chance of a slowdown in growth in the
second 1/2 of the year.Â So, despite what all the media clones are spouting, in
addition to a lot of technical resistance, there should be no question why
stocks have struggled recently.Â If the interest rate picture were to clear up
and a possible “soft landing” were to develop in China, then the key indexes
could challenge their highs posted earlier this year.Â However, at the moment,
there appears to be far too much uncertainty in order for stocks to achieve a
sustainable move higher.Â

Looking ahead this week, the economic calendar is fairly light with Friday the
busiest day with the May PPI and Preliminary Michigan Consumer Sentiment Index.Â
Thursday is rollover day for stock index futures as September becomes the active
month (symbol is U).