Wednesday, July 28, 2010

Morning Update/ Market Thread 7/28

Good Morning,

Thank you again to those who participated in an enlightening manner on the market threads while I was away! While I’m back for today, I am only partially up to speed and will be gone again off and on the rest of this week. Next week the markets should get my full attention.

Equity futures are lower this morning and they have broken my rising wedges on the futures – but not yet on the day only charts. It is possible that they simply broaden and morph into an up channel, we will have to watch the action to see. A rising wedge should break down fairly hard if it’s truly in play, if we move sideways then there may be another wave higher coming. Below is a snapshot of the rising wedges as depicted on a 15 minute chart, DOW on the left, S&P on the right:

The dollar is flat, bonds are down slightly, oil and gold are both flat after very large down moves yesterday.

The economic data continues to deteriorate – I can’t recall a truly positive piece of news over the past month or so and that certainly did not change while I was away. The ECRI has now fallen more than 10% and is a good indication that another recession will be recognized.

This morning the (worthless) MBA Purchase Index rose 2% over the prior week. The Refinancing index fell 5.9%, pushing the composite index down 4.4%. Housing remains in the gutter and will remain so for quite some time. I think it’s interesting to note that the media is reporting home ownership has fallen to 11 year lows (duh), and in unrelated pieces that renting is a growing trend (duh). This trend will reverse, but we are not close to that point yet as renting is still financially favorable to owning in most areas and circumstances.

Durable Goods Orders fell another 1.0% for the month of June, this follows a 1.1% drop in May. The Consensus was expecting a rise to a positive 1%, so they missed completely in the wrong direction. The year over year numbers are higher, but keep in mind that comparisons to that time frame are very easy and that there was much stimulus between then and now – much of which is no longer with us. Here’s Econoday:
The manufacturing sector sputtered in June, according to new durables orders. New factory orders for durable goods in June fell 1.0 percent, following a 0.8 percent drop the month before. The June numbers fell well short of market expectations for a 1.0 percent boost.

The June decline was led by the transportation component. Excluding transportation, new durables orders slipped 0.6 percent, following a 1.2 percent gain in June. Outside of transportation, major components were mixed, albeit net negative. Other than the fact that markets were disappointed that Boeing orders did not turn overall durables positive, the monthly trend is still upward, although volatile.

For the second month in a row, the big negative was the transportation component which fell 2.4 percent in June, following a 6.6 percent drop in May. Nondefense aircraft decreased 25.6 percent after falling 30.2 percent in May. Defense aircraft rebounded 6.5 percent. Motor vehicles continued a recent string of gains, rising 2.5 percent in June.

Other components were mixed. Declines were seen in primary metals, machinery, computers & electronics, and in "all other." Components gaining were fabricated metals and electrical equipment.

Nondefense capital goods orders excluding aircraft in June rose 0.6 percent, following a 4.6 percent spike the month before. Shipments for this category edged up 0.2 percent in June, following a 1.5 percent rise in May.

Year-on-year, overall new orders for durable goods in June were up 15.9 percent, compared to 15.2 percent in May. Excluding transportation, new durables orders came in at up 15.0 percent, compared to 17.8 percent the prior month.

On the news, equity futures slipped and Treasury yields edged down.

Turning to the charts, on the 3 month SPX chart below you can clearly see the a,b,c nature of the rally off the July 1 low. Wave c is now proportional to wave a time wise, but it is weaker distance wise. This tells me that the ultra bullish count some EW people are looking at is incorrect. If they were correct, then this would be a wave 3 higher which should be getting stronger on the next level of 3 – it’s not, it’s getting weaker with price and it’s on lower volume. As I predicted, the SPX 1115 area has acted as resistance for now – it is a 50% retrace level of the decline since April and has significant resistance in this area. Again, it could be that we are simply basing for another push higher:

The daily RSI bullish divergence that was in place is almost washed out at this point and there is now a fairly significant short term bearish divergence in place on the shorter timeframes.

What is bullish is that both the Transports and Industrials made new closing highs above their June highs. This is a secondary DOW Theory buy signal. A primary signal would only come by exceeding a primary high, that would be exceeding the April mark. Still, this should not be ignored as it gives the bulls fuel and fodder to believe that the trend has changed. That’s what wave 2s do, they are meant to fool.

Long term bonds have clearly broken their uptrend, but both TLT and the TNX look like they are running into support/ resistance.

The VIX broke support beneath the 200dma, but I note is back above it this morning:

Both the Transports and the RUT produced closes above the upper Bollinger Band and then yesterday closed beneath them. Those are sell indications, but prices need to be watched to ensure that they don’t close back above them – in other words, follow-through is required. Below is a daily of chart of the Transports showing this:

Overall I’m still not believing the bullish case and I’m certainly not buying the supposed massively higher earnings either. What I see are financial companies marking their garbage to model and that is producing fluff across the spectrum. Start marking assets to market and then we’ll see what is truly real in the market – until then it’s all simply games and illusion.