Sunday, May 27, 2007

Memorial Day Bounce

Friday's action was little more than a shallow, pre-holiday bounce.

Its most significant accomplishment was to delay any further decisions about the current pullback. Recent declines in various technical indicators -- the TOF Ratio, IBD100, MACD, OBV, Money Flow, etc. -- were suspended by Friday's low-volume rebound. The "strength" changed nothing, and stocks remain in pullback mode.

How deep and long this weakness lasts is impossible to know. The market flashed wobbles the entire month of May, making this downdraft probably the worst-kept secret on Wall Street. What effect this obviousness has on the pullback will be an interesting subplot to follow.

As price slides, it's important to note that fundamentally very little has changed. Bond yields climbed, but rates moving back towards 11-month-old Fed policy is hardly surprising. Greenspan and China? All Greenspan did was to say out loud what prudent investors suspect to be true anyway. Housing, jobs, manufacturing, the consumer -- recent data contained few genuine surprises in either direction.

Technically however, there are lots of reasons to sell. Finally at an all-time high, the SPX chose an ideal spot to pull back into a handle-like reassessment. The NASDAQ halting at 2600 has program trading written all over it. The NYSE is above the upper boundary of a 3-year channel. The thing about technical moves -- up or down -- is that they generally don't last long. Technical weirdness gets its business done and the trend resumes. Fundamental weirdness takes much, much longer.

The IBD100 and market internals were very strong on Friday, but the light volume rendered the action essentially meaningless. In the world of TA, the low-volume inside day on the chart below is like a day that never happened. The market could climb near-term, but TA says that it's a low probability move.

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For the bulls, the most promising chart continues to be the Composite weekly. The weekly chart shows consolidation, not collapse, and the key tell is 3 weeks of stable price closes on lower volume. Price has been volatile, but it held at the 10-week and all of the technical indicators remain in good shape.

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Thursday's 16.2% New-Home Sales pop caused quite a stir this week, but the big sales jump wasn't the most provocative part of the report. The fact that New-Home prices fell 11.2% -- the largest one-month tumble on record -- was the more critical development.

I've described before how economics teaches that price cuts are the final, painful step to a housing recovery. At long last, the builders are throwing in the towel, and it's these bargains that are stimulating demand. Unfortunately, this will also be the most excruciating part of the cycle for the builders as they finally book their losses.

The unfortunate part is that even with the New-Home price plunge, the housing debacle is far from over. New-Home sales are just 15% of the housing market. Existing-Home Sales are the real problem, and there isn't any evidence that sellers are ready to cave in and drop their asking prices. Watch for that. It will have a regional bias, but when existing home prices decline it will generate negative press. However, it will be the best bad news the housing market will ever receive.

Should the 50% retracement hold on the chart below, the 2005-2008 housing recession will go down as a moderate one. I suspect the HGX will likely break to new highs at the precise moment that the builders flip economically positive.

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Utilities require lots of capital and their revenues are regulated. This makes them very vulnerable to higher rates, and the Treasury yield rally has finally hit the Utes hard. After a fantastic run (40% in 13 months), they appear to have begun work on a new base. Unless the sweet divs are critical to your plan, it's not a bad time to take a little off table.

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The Transports -- like the Composite weekly -- continue to make the case that the current pullback will be minor. The bullish ascending triangle consolidation continues -- for now anyway. Note that CCI(20) has slipped below 100, a sign of weakness.

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Short-term, the market is in the throes of consolidation. This means up, down and sideways, with the bias being down. It's very tricky to trade, and you should have an investment profile that feels comfortable.

Based on multiple indicators, the odds suggest the current chop lasting for weeks, maybe even months. The market action won't be all down, but if the action feels gut-churning to you, it may be a sign that you have too much risk exposure.

Hope you're having a great Memorial Day weekend. I have a brother-in-law who's an Air Force Colonel in Afghanistan, and my thoughts and prayers are with him. He isn't due back stateside until July 2008, but that's why he gets paid the big bucks.

For any Travel Put fans, I'm flying on Tuesday morning. :)




Tom said...

Have a good memorial day.

dk said...

Thanks, Tom. Same to dk