Market Wrap Up July 21/05

by Martin Goldberg

Tell Your Fundamentals to be Quiet!
“It’s a Technician’s Market”

“Tell your fundamentals to be quiet!” It’s that kind of market. Bad news is good news and good news is good news. Sure, there are many fundamental facts that would suggest stocks don’t deserve historically high valuations in the aggregate and bubble-like valuations in several isolated localities. Even as quarterly earnings are coming in with numerous write-offs, one time events, and special items, their interpretation by the market is similar to the 1990’s when any optimistic explanation by management would suffice. After reporting increased sales a few weeks ago based on an “employees discount,” General Motors reported shrinking margins and a huge quarterly loss of $1.2 billion, yet the stock finished little changed. This occurred as their two US rivals initiated similar margin-threatening price war tactics. Eastman Kodak, a company whose core business is dying a quick death due to obsolesce, badly missed earnings expectations as film sales “eroded,” and the stock gapped down, yet finished little changed. Yahoo and Intel reported earnings which showed the world it’s hard, even for technology companies, to make money, and yet this has little effect on the general stock market. A few soothing words by Alan Greenspan who suggested that the economy is on a sustained expansion followed by about an hour of accolades by various congress-people, and the stock market had all the reason it needed to produce a high volume decisive rally. Forget any thought of the long-term fundamental picture. In many cases that will get you only rationalizations about the long term while your next door neighbor gets paper profits.

While the major indices are making 4-year highs, negative emotions have never run higher from the bear camp, and optimism has probably never been greater with the bulls. From the bullish side, “Mad Money” was shown before a live universally bullish cheering and hooting public. Such optimistic bullishness draws out the negative and emotional feelings in the bears. While reading a FSO editorial, I identified an abbreviated derogatory term that would make a sailor blush, used to describe government economic data reports. Even our webmaster, a resident of a Navy town, hadn’t heard of this term before. (It was quickly edited out.)

Emotions are running high. The public is being bombarded by a wealth of economic data suggesting things are fundamentally sound. Yet, for anyone who views the big picture with a critical eye, most of this data is fiction at best and dirty, bad-spirited deception at worse. Negative emotions are running higher in the bear camp for the simple reason that the “truth” of the data is being confirmed and accepted by the public based on the positive direction of the stock and real estate markets. It is tough to refute or take issue with the “truth” that is making much of the public wealthy on paper. For those who professionally manage other people’s money for a living, the current environment must be even more frustrating. Consider the thoroughly considered and cerebral debate between the professionals in the inflation and those in the deflation camps. While their emotions may be running high, it must be even more frustrating that over the last 2 years, these folks have been locked in both a debate and trading range with their fundamentally-based positions, while money managers who suggested clients to buy Nordstrom based on the potential for a good quarter were better off.

So without any apparent value in fundamental analysis, where is the market going? Following are some technical impressions that may provide insight to help answer that question.

S&P 500 Long-Term

The two year chart of the S&P 500 shows a clear resistance line that became a support line in late April of this year. Since that time the index has gained 8.7% in less than 3-1/2 months. In my view, there is no fundamental discussion about whether the S&P is fairly valued until the index pays at least 3% in dividends (current dividend yield = 1.87%). Yet the best reason to purchase the $SPX in late April was that it was on its former resistance line. An appropriate stop loss below the line (close decisively), and there was sufficient risk reduction. At this time, the S&P index is likely to be a “passenger” of the market leading sectors and individual stocks including the homebuilders, mid-cap stocks, Nasdaq, and biotechnology stocks.

Leadership - Homebuilders

The run in the homebuilders has been impressive; yet the most impressive action in these stocks has probably not yet been seen. While the fundamental debate is whether there is a housing bubble, the homebuilder stocks have continued their linear bull runs. Since July of 2001, the Dow Jones US Home Construction Index has been in a fairly consistent linear uptrend. This week, the index appears to have been decisively broken to the upside as the index is entering into a parabolic move. I believe that this is the beginning of a final blow-off move in the homebuilding stocks. It is notable how, as the trend progressed over 4 years, the index deviated less and less from the red resistance line, until finally the index penetrated above its resistance recently. At this time, everyone knows these stocks are going up. It is difficult to tell how much further up the trend will go; yet after a multi-year bull market, an acceleration of the upside trend suggests that this is probably the final run.

Leadership - Nasdaq

Things are looking bullish in the Nasdaq of late, but based on the 6-year monthly chart, it may be too early to get out the long-term party hats. (For now paper party hats will probably do.) Since the January of ’04 top, there have been more down months that have occurred on generally higher volume than the fewer up months. There were 10 down months and 8 up months. There were 9 down months that occurred on greater-than-average volume whereas only 4 up months occurred on greater-than-average volume. So far, this month’s rally has taken place on less than average volume, and there are only 7 trading days left in the month of July. Wednesday’s daily volume was significantly greater than average, so it will be relevant to see if the month closes out with high volume days.

The one-year daily chart shows that the Nasdaq closed Wednesday a fraction of a point from its January 2004 high. The Nasdaq is at a critical juncture. With a lack of basing at this level, it seems unlikely that the uptrend is sustainable. A low-volume pullback would be healthy action.

Leadership - Mid-Caps

The general market will likely take its queue from the market-leading mid-cap stocks. Note how the mid-cap SPDRs are in an emotional broadening pattern and as of Wednesday evening, it is bumping its head on an upward sloping resistance line.

Leadership - Biotechnology

The biotechnology stocks are an emotional leader of the stock market – they tend to do well when optimism is the greatest, and today’s market is no exception.

A stock within the index which still has significant upside potential is ImClone Systems. Their last few press releases have been positive and we are in a market that loves happy talk from a household name. The stock has decisively broken above the resistance of a descending wedge.

Leadership (Former) – Transportation Stocks

After forming what appeared to be a head-and-shoulders reversal that was not completed, the Dow Transportation Average now sits at a resistance line that was formerly a support line during its multi-year uptrend.

A key liquid stock within the transportation index, Federal Express, is still making lower highs and lower lows.

Today’s Market

There was nothing in the market today to refute the continuation of the 1-1/2 year trading range in the major indices. The Nasdaq may have been turned away at its January 2004 high of 2191.6, and closed out today at 2178.6. For the momentum crowd, the 14-day RSI indicator will go into a “sell,” provided that the Nasdaq opens down tomorrow which appears likely in light of the apparent negative reaction that the market is having from Google and Microsoft’s quarterly reports. It wouldn’t surprise me if Google ends tomorrow little changed or even up since this company has a lot of support from the analysts and spin doctors on Wall Street. But clearly the market’s reaction to tonight’s earnings news will probably set the tone for the next couple of weeks. A sustained negative reaction will signal that speculators liquidate longs and the market will likely move down to 1890 on the Nasdaq as the trading range will continue. If a rally ensues after 10:00am New York City time, 2192 on the Nasdaq may turn into short term support.

It is tempting to mark the stock market top as the Cramer live audience Mad Money show. For those of you who haven’t seen it, you must know that it was a true spectacle – a speculation fest, if you will. Of all people, New York Attorney General, Eliot Spitzer made an appearance too in order to discuss the Grasso case. The live audience Cramer show conjures thoughts of the much discussed Jerry Granville rising from the coffin TV appearance a few decades ago, which I’m told marked the end of Granville’s hot guru tenure.

The real action today was in bond market, where interest rates rose decisively. Below is the intermediate term technical chart which is updated from last week’s article. The 10-year Treasury note interest rate has crashed through all three popular moving averages. It now sits at 4.282 percent where there has been a lot of action over the last three months. There’s short term support at between 4.18 and 4.2 percent. If interest rates continue to move up as seems to be the short term trend, then this will hurt stock valuations (eventually).

Gold finished today with all long term trends intact. It is in a bull market that must be given the benefit of the doubt until proven otherwise.

Below is the long term chart of Oil. A continued swoon back to the 200-day moving average which is also a trend line could provide the Dow transports with the excuse they need to continue to move higher and gain legions of Dow Theorists’ attention. It would also provide a good entry point to initiate or increase positions in oil stocks which are also in a bull market.

A lot of discussion on China’s revaluing, so I’ll only add my general opinion that if today’s decisive move in the bond market is the beginning of a longer term trend, it will be bad for US stocks and the US housing market. But of course, this is obvious.

Have a good one.

Martin Goldberg

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