Market Wrap Up June 30/05

by Martin Goldberg

It seems as though practically everyone has weighed in with their fundamental opinions that suggest what will happen. Yet the “when” is a puzzle that has all of the bearish fundamentalists impatient as their resolve seems to become stronger with every month that passes without a major break in the stock and real estate markets. Beyond that, it almost seems as though there are many of the same people writing the same stuff over and over. While I’m tired of reading stuff like that (and you may be too), for the moment, I’m also tired of writing it. The long-term bearish technical analysts are no better off either. Except for oil, commodities, and the first phase of the precious metals bull market, the broad long-term trends that they predicted have not yet taken form. These technical analysts are left with the only game in town to discuss – chasing short-term rallies and swoons. It seems as if the most effective method involves waiting until a support line appears to be broken (not decisively), waiting for the trend change from down to up, and then jumping in on the long side to ride the rally up before a trend runs out of momentum. (Of course with a stop loss just below the trend change.) Although not fundamentally righteous, it helps pay the bills.

For the optimistic bulls, the game is equally frustrating. In spite of record corporate profits and a slew of rosy economic and corporate forecasts, the market has done very little except for its trading range. The trading range must be frustrating as bulls wonder why the market has yet to produce the upswing that will take valuations to levels only seen in the late 1990’s boom and no other time before or since.

With every swing to the upward range of the market’s trading range, the volatility indices seem to be cutting new lows. This is perhaps telling us that with each swing, more people are becoming comfortable with the market not crashing. Maybe the general feeling is that these markets are too big to crash. Maybe the lack of volatility is caused by just a few hundred more hedge funds placing their seemingly no risk bets on both sides of derivatives trades.

How long can this last? As a consumer led economic “boom,” it would appear that the next big milestone would be Christmas 2005. We’re less than 5 months away from Thanksgiving, and the Christmas shopping season is when US consumers spend most of their money and retailers make most of their profit. It’s a good bet that the pace of interest rate hikes will be “measured” and policy will be directed to enhance a booming holiday shopping season in the US. The policy makers know that the consumer must be kept confident through Christmas or else the wealth effect is history. With the US consumer happily spending, there is still a chance of something good happening in the real US economy. It hasn’t worked to this point, but who knows? This may be the time that becomes the charm.

A similar bet could be safely placed on any significant monetary policy decisions that come out of China. Much of the chattel exchanged in the holiday season comes from Chinese producers so it is unlikely that China will hurt their best customers (for now) at the expense of their producers.

Although the odds would not appear to favor it, a slow Christmas would bring down the forward looking stock market in the fall of 2005.

Follow the leadership. If key supports are broken in consumer stocks (decisively!), this could trigger a massive sell-off in these and related stocks. Their valuations and dividends are at historical overvalued levels when considering their 5-year average earnings. In many cases consumer stocks are trading at historically high multiples of historically high and unsustainable earnings. These companies are cyclicals and unless the consumer boom is sustainable for the first time, they will deflate to reasonable valuations and dividends. The only way the consumer boom is sustainable is if the massive consumer debt is forgiven. Short of that, the debt will have to be paid back at the expense of US consumers’ future spending. Yet until the support levels on these charts are broken, it would be foolhardy to short consumer stocks or buy puts. For no fundamental reason whatsoever, bubbles, such as the one in consumer debt and its associated spending, tend to end in a final crescendo.

My prediction is that the sell off in these cyclical stocks may have to wait until at least the winter of ’06, yet this could change if support levels of important consumer stocks are decisively broken.

Keys to Watch in the Stock Market - Transports

A key index to watch in the near term is the Dow Transports. As pointed out in this space (and many other places later), the transports are forming a head-and-shoulder (HAS) reversal pattern. Yet over the last couple of days as the transports approached the neckline of the pattern, they staged (you guessed it), a sharp and tradable rally. As I draft this on Wednesday, there is probably some momentum left in the transport’s rally. Yet in the longer term, the transports are a likely key indicator to watch to gauge whether the stock market will exit its trading range soon.

Another key worth watching to gauge the health of the overall market is the integrity of support breaks in individual stocks. The action over the last 18 months has shown numerous instances of stocks’ support levels which seemed to be decisively taken out, while the stocks then came back to well above their former support levels and often times formed a broadening pattern. This action was indicating a resilient market.

Along those lines we have the current Dow transport leader, Federal Express (FDX), at a critical juncture as shown in the chart below. With the transports having short-term momentum, it will be important if Federal Express can reclaim its former support line. If this line is reclaimed, then the news from a host of experts (and me) about the faltering transports could become yet more bearish drivel, and the stock market's trading range will be maintained.

Today’s Market

And now for more idle predictions about what the Fed will do. Figure on one more 1/4th point rate hike in August, and then a pause until after the winter holiday season. If the market shows significantly lower futures tomorrow morning, figure on a Fed governor making a speech of well publicized remarks to soothe whatever seems to be ailing the stock and/or bond markets. If this doesn’t happen, then you may turn in a copy of this for a free cup of coffee at the Paoli PA Starbucks.

The US stock market finished down across the board today on heavy last day of the quarter trading. Every major US index was down except for financials (about even), and utilities (“the righteous investment of the month”). Oil was down, gold down, and the CRB down, slashing through its 50-day moving average, where it sits in a long and intermediate term uptrend, and a short term swoon.

Oil appears to have failed to hold its all time high and therefore the odds favor a continued downturn in the days to week timeframe.

You may see most technical analysis’ columns for one of the most watched downtrend lines in the unhedged gold stock index ($HUI). We’re at the top of the downward-sloping trendline, so it is at a critical point.

The action today in the transports was bearish as a tradable rally may have lost its steam. As I described above, of particular interest is the action of the popular market leader Federal Express which failed to penetrate the resistance line (former support) today. The failure was confirmed with an ugly red candlestick (opened at the high and closed at the daily low). This all occurred with oil down significantly today, yet of course, one day does not make a market.

A quick scan of international ETF’s suggests that there are many key European indices nearing a critical juncture in that their 50-day moving averages are about to cross below the 200-day moving averages. These include ETFs in the EAFE index, Sweden, Belgium, Germany, Italy, Spain, France, South Africa (cross completed), UK, European 350, and the Topix 150. Here’s a typical chart.

Bond prices were higher today and I’m thinking that the Feds will not want the 10-year note yield to sink much lower than 4% or else it will appear as if the so-called “growth” in the US economy may be, in some way, suspect.

And since we’re down to the shortest term, it looks like the dollar is tired with its current level, and it’s hankering to drop against other major currencies. It’s been 14 trading days since it has touched its highs, and it has tried but failed 6 times at the 88.4 level.

Have a great 4th of July!

Martin Goldberg

Martin F. Goldberg, MS, P.E.
Market Analyst
email mdelmgoldberg@comcast.net