Date: July 27, 2008
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Market Update
MARKET HEALTH:
MARKET IN CORRECTION! INDEXES going into Day 10 of trying to confirm New Rally!
We stand to be corrected. Our data had showed that the NASDAQ had confirmed a new rally on Tuesday, July 22. However, although volume was substantially higher than the previous days volume, which is what we like to see, prices on the Nasdaq had gapped down this day and fought hard to close up in price for the day, but only by a 1.2% margin. We must have a % change of 1.75% or higher on strong volume.
Last week it was the Nasdaq that held up the strongest of the major indexes with a 1.2% gain. The S&P 500 fell .2% and the DOW slid 1.1%. So this week we have one more chance for one of the major indexes to confirm a new rally. Day 10 will begin Monday for the Nasdaq and day 9 for the S&P and DOW. We must be aware of some of the catalyst that could drive the markets next week one way or another.
Earnings will play a big part in the picture and this week is a big week for earnings reports. So far it has been a mixed bag of reports with 249 of the S&P 500's companies reporting. Halfway through second quarter earnings season and as expected with the S&P 500 financial stocks overall have reported a -85% change from a year ago. As we all know this has been a big drag on the markets and a major culprit to the correction. The other big loser has been Consumer discretionary with a -24% change. People are preserving their incomes and clearly spending less. On the positive side, and as one might expect with Oil Prices flying, Energy related earnings have been stellar with a +25% increase from a year ago. Technology has also seen a boost in earnings rising +15%.
How the rest of the S&P 500 companies report their earnings will most likely play an important role in which way this market wants to head. If the market views earnings as not being as bad as they had expected, in the Finance and housing markets, they could view this as the turn around point, if these same reports look worse than expected we may very well be heading further south if the markets see more gloom ahead. Remember the markets always look to the future, 6-12 months out, so if to the Big Money Investors, it looks like earnings down the road will still be dismal, we should expect another sell off. If the Big Institutions feel we have seen the worst in Financials and the housing market, and they feel the economy is improving, we will start to see them accumulate equities again. All of this accumulation or distribution, of course, will show up in the price and volume movements of the major indexes, and this is where we must keep a keen eye as the markets try to pick a direction.
Oil prices have now dropped $24 dollars from their high of $147. It will definitely be a positive sign for the major indexes if Oil continues to slide. We have now stated in several newsletters the inverse relationship that Oil and the major indexes have had and if this market is to continue higher or confirm a new rally, Oil will have to help us out by continuing lower.
This week we must keep a close watch on the earnings reports, especially the financial sector. In this sector the keywords will be "NOT AS BAD AS WE EXPECTED". We will also need to watch Oil and its effect on the markets. Hopefully it will continue lower. Also, the news is out that the Senate has passed a housing rescue bill to help more than 400,000 homeowners avoid foreclosure. It will be interesting to see how the market reacts to this news in the coming days.
For now we must be patient and let the markets decide which route they will take. We should get the answer this week. So let us be prepared with a watch list of High Quality F.I.T. Stocks. If the markets do confirm, please remember we want to ease into the markets with minimal shares and be very selective on the stocks we choose. This is much like taking a test run to see how the market reacts. Follow all of your investment rules to the letter and do not second guess them.
Let's look at the Charts!
NASDAQ
3 Year Chart with Weekly price bars.
This 3 year chart gives us a great long term view of the Nasdaq. First we can see that overall for the real long term we are still in a upwards trend. However, since October of 2007 we have continued to make lower highs and both the 10 week and 40 week moving averages have started to slop downwards. On the other hand the Nasdaq is not making lower lows, as indicated by points 1 and 2, which means prices are converging upon each other. When prices begin to converge and consolidate it is only a matter of time before they explode out of this consolidation in one direction or the other. It looks like prices have the ability to rise up to their 40 week moving average at 2400 and then could fall back down to test the 2200 level. At some point one of these price levels will break and much of this will depend on our economy.
The Nasdaq:
6 Month chart with daily price bars:
The Nasdaq has really been showing some nice buy side volume in the last few weeks as indicated by the white oval. The number 2 represents the first day of the new rally attempt. On Tuesday, July 22, inside the white oval, the Nasdaq actually gapped down from the previous days close and then gained strength for the rest of the day. It was a very solid day for the Nasdaq and felt like a confirmation day, but it was NOT. The very next day, Wednesday, July 23, also inside the white oval, was another very strong head fake by the Nasdaq. On this day the Nasdaq also tried to confirm the new rally rising as much as 2% for the day before closing at a 1.2% gain. To confirm the rally we must have a 1.75% further gain than the previous days gain on strong volume. Thursday, July 24, the Nasdaq had an off day falling in price. The only consolation is that volume was lighter than on the two previous up days. The beginning of this week is critical to which way this market may head. Keep a close eye on all three of the major indexes for confirmation as time is running out for them to confirm.
What needs to happen next week in the markets?
As we have discussed for weeks now, the Oil Sector must continue to decline, the Financial Sector must sure itself up, and The Big Investors must feel it is safe to start accumulating equities again.
We now have a new rally attempt starting from the major indexes with days 9-12 coming next week, and there is an attempt from the OIL Sector and the Financial Sector to break through previous long term boundary lines. This week will be an interesting week for the major indexes, so watch closely.
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