When we look for indicators of a good turn in the market, we expect to see an oversold reading to initiate a bounce. On May 21st, the Volatility Index VIX spiked to 48.20, the highest since March 2009. Two days later, the S & P undercut the February low of 1044.50. The May 25th low of 1040 was tested on June 8th, holding slightly above that low. The Dow, NASDAQ, and Russell 2000 all undercut that low. The S & P and Dow posted “minor reversal day” gains. The NASDAQ and Russell were a fraction of a point shy, but were huge reversals nonetheless. Two days later we had a “follow-through” to the upside, but remained below key resistance levels. We’ve had the discussion about volume and that it is only one indicator of conviction. Volume turned notably lighter when the market plunged on the May jobs report. For a day down 3.5%, volume was less than average. However, that volume proved to be relatively high as the next few weeks showed that the new norm for the NYSE might be closer to 1.1 billion than the 1.44 average three weeks ago. The NASDAQ was highly volatile, with volume on a daily basis up around 2.67 billion. Now we are at 2.2 billion. I suggest that one look at volume in light of the fact that summer has officially begun, and strong volume is “relative”. The Volatility Index fell to its lowest close since May 13th, when the S & P was at 1157.
Technically, the market started focusing on the domestic fundamentals, a better acting Euro, and the potential for solid earnings. On the economic front, import prices fell 0.6% in May, far less than the 1.2% decline anticipated. Year-over-year, import prices are up 8.6%. The drop was led by falling fuel prices. Fuel import prices were off 4.9% in May. US export prices rose 0.7%. Non-fuel import prices rose 0.5%, which can be taken as a sign of increased demand for foreign-made goods, thanks to a stronger Dollar. Demand, in any form, is a good thing at the bottom of an economic cycle. The Empire State Index rose to 19.57 from 19.11. Expectations were for a reading of 20. While this may have come up shy, it was still an uptick. New Orders rose to 17.5 from 14.3. Shipments rose to 19.7 from 11.3. Inventories declined to -1.23 from +1.32. While I don’t take the NY Fed Survey to be a big indicator for the national data, they are good numbers. Orders are up and inventories are down. That means manufacturers and factors are still being pushed to produce and only through productivity increases are they able to meet demand. Sustained demand will eventually lead to new jobs, and that is what the market craves. Finally, the NAHB Homebuilders’ Index for June slipped to 17 from 22. A reading of 21 was anticipated. This is a sentiment index. Homebuilders are worried about demand in a post-stimulus world, and they should be. A significant slowdown in sales is anticipated. The stimulus did what it was intended to do, help absorb some of the shadow inventory. Today’s report on May Industrial Productions (est. +0.96%) and Capacity Utilization (est. 74.5%) are more important indicators of economic strength going forward. Today will be a busy news day.
The Euro also saw some important follow-through action to the upside. After breaking above its 21-day moving average on Monday, it faded to close right on that line. Yesterday, the Euro proved itself by closing near the high of the day, and at its highest close since May 27th. The Euro isn’t an exciting story for the longs. The currency faces significant technical resistance at every stair-step higher. We’re looking for rather stiff resistance at 1.2672, the May 21st intraday high. The 10-week moving average is slipping at 0.0025 per day and is currently at 1.2739. By Friday the moving average will be coincident with the May 21st high and will provide added technical resistance. However, the turn off of the low is a short-term positive for stocks.
FedEx Corp. FDX (+2.0%) is expected to show second quarter strength when the company reports its fiscal fourth quarter earnings today. Expectations are for $1.33, up from $0.64 a year ago. FedEx is often looked upon as an indicator of economic activity, as it is used to ship goods to market. However, FedEx will also give us insight as to how much the stronger dollar has resulted in an increase of imports from places like China. Imports have been rising as a result of the stronger Dollar. Crude prices may have been bouncing over the past month, but are still down from the $86 level seen in April. Crude is a component to watch. It, too, is a measure of economic activity, although somewhat skewed by the moratorium on drilling imposed following the extended BP disaster. Crude has formed a short-term base under its 200-day moving average at $76.77. It’s 10-week moving average is coming down offering more resistance at $77.94. This will be a test for crude at this level. If crude can move above this resistance, and looking like it will do so with this close above $76.77, it will face overhead supply above $80. Crude closed at $77.03. Energy and Basic Material sectors did well, thanks to the rally in the Dollar. While these areas are not leadership groups, their participation was essential in yesterday’s rally and indicates stability in currency and economic growth. Therefore, we continue to look for these groups to move higher, but given an equal weight to the averages.
The summer rally was confirmed yesterday by breaking above the 200-day moving average on the Dow, S & P, NASDAQ, NYSE, and Russell 2000. We may see days of consolidation and pullback here and there, but the turn looked good last week and the rally has met our requirements that the turn be for real. Our target remains 1150 by the end of July.
When we look for indicators of a good turn in the market, we expect to see an oversold reading to initiate a bounce. On May 21st, the Volatility Index VIX spiked to 48.20, the highest since March 2009. Two days later, the S & P undercut the February low of 1044.50. The May 25th low of 1040 was tested on June 8th, holding slightly above that low. The Dow, NASDAQ, and Russell 2000 all undercut that low. The S & P and Dow posted “minor reversal day” gains. The NASDAQ and Russell were a fraction of a point shy, but were huge reversals nonetheless. Two days later we had a “follow-through” to the upside, but remained below key resistance levels. We’ve had the discussion about volume and that it is only one indicator of conviction. Volume turned notably lighter when the market plunged on the May jobs report. For a day down 3.5%, volume was less than average. However, that volume proved to be relatively high as the next few weeks showed that the new norm for the NYSE might be closer to 1.1 billion than the 1.44 average three weeks ago. The NASDAQ was highly volatile, with volume on a daily basis up around 2.67 billion. Now we are at 2.2 billion. I suggest that one look at volume in light of the fact that summer has officially begun, and strong volume is “relative”. The Volatility Index fell to its lowest close since May 13th, when the S & P was at 1157.
Technically, the market started focusing on the domestic fundamentals, a better acting Euro, and the potential for solid earnings. On the economic front, import prices fell 0.6% in May, far less than the 1.2% decline anticipated. Year-over-year, import prices are up 8.6%. The drop was led by falling fuel prices. Fuel import prices were off 4.9% in May. US export prices rose 0.7%. Non-fuel import prices rose 0.5%, which can be taken as a sign of increased demand for foreign-made goods, thanks to a stronger Dollar. Demand, in any form, is a good thing at the bottom of an economic cycle. The Empire State Index rose to 19.57 from 19.11. Expectations were for a reading of 20. While this may have come up shy, it was still an uptick. New Orders rose to 17.5 from 14.3. Shipments rose to 19.7 from 11.3. Inventories declined to -1.23 from +1.32. While I don’t take the NY Fed Survey to be a big indicator for the national data, they are good numbers. Orders are up and inventories are down. That means manufacturers and factors are still being pushed to produce and only through productivity increases are they able to meet demand. Sustained demand will eventually lead to new jobs, and that is what the market craves. Finally, the NAHB Homebuilders’ Index for June slipped to 17 from 22. A reading of 21 was anticipated. This is a sentiment index. Homebuilders are worried about demand in a post-stimulus world, and they should be. A significant slowdown in sales is anticipated. The stimulus did what it was intended to do, help absorb some of the shadow inventory. Today’s report on May Industrial Productions (est. +0.96%) and Capacity Utilization (est. 74.5%) are more important indicators of economic strength going forward. Today will be a busy news day.
The Euro also saw some important follow-through action to the upside. After breaking above its 21-day moving average on Monday, it faded to close right on that line. Yesterday, the Euro proved itself by closing near the high of the day, and at its highest close since May 27th. The Euro isn’t an exciting story for the longs. The currency faces significant technical resistance at every stair-step higher. We’re looking for rather stiff resistance at 1.2672, the May 21st intraday high. The 10-week moving average is slipping at 0.0025 per day and is currently at 1.2739. By Friday the moving average will be coincident with the May 21st high and will provide added technical resistance. However, the turn off of the low is a short-term positive for stocks.
FedEx Corp. FDX (+2.0%) is expected to show second quarter strength when the company reports its fiscal fourth quarter earnings today. Expectations are for $1.33, up from $0.64 a year ago. FedEx is often looked upon as an indicator of economic activity, as it is used to ship goods to market. However, FedEx will also give us insight as to how much the stronger dollar has resulted in an increase of imports from places like China. Imports have been rising as a result of the stronger Dollar. Crude prices may have been bouncing over the past month, but are still down from the $86 level seen in April. Crude is a component to watch. It, too, is a measure of economic activity, although somewhat skewed by the moratorium on drilling imposed following the extended BP disaster. Crude has formed a short-term base under its 200-day moving average at $76.77. It’s 10-week moving average is coming down offering more resistance at $77.94. This will be a test for crude at this level. If crude can move above this resistance, and looking like it will do so with this close above $76.77, it will face overhead supply above $80. Crude closed at $77.03. Energy and Basic Material sectors did well, thanks to the rally in the Dollar. While these areas are not leadership groups, their participation was essential in yesterday’s rally and indicates stability in currency and economic growth. Therefore, we continue to look for these groups to move higher, but given an equal weight to the averages.
The summer rally was confirmed yesterday by breaking above the 200-day moving average on the Dow, S & P, NASDAQ, NYSE, and Russell 2000. We may see days of consolidation and pullback here and there, but the turn looked good last week and the rally has met our requirements that the turn be for real. Our target remains 1150 by the end of July.