One “denial” that came to light on Wednesday may have been the cause for the market sell-off of Tuesday. China’s State Administration of Foreign Exchange denied rumors as “unfounded” that they were mulling dumping US debt holdings. China holds nearly $2.5 trillion in US and other major currency issuer debt, which would make their exit from a position a major concern. It is also unclear as to why this might be the catalyst to the market giving back a gain of 170 Dow points midday. The biggest hit was taken in the small cap names. On the rally, bonds were seeing a strong bid. If rumors were that China might dump our bonds, I doubt we would have seen solid buy interest in our 10-year notes. Whatever the catalyst, Tuesday’s intraday gain did challenge 1040 on the S & P. Remember, 1040 was the low in February, May, and held in June. When that level broke, many jumped to the conclusion that it was a “Head and Shoulders Top” formation, which we vigorously refute. There is much more to such a pattern than the simple fact that the price action looks like a head and shoulders. The fact that the high, or the head, was confirmed by breadth, volume, leadership, and the Dow Jones Transportation Index negates the pattern from being a classic H&S top. Yes, 1040 was still a support point that was breached, but it did not generate a wave of stop loss selling, as many projected. Tuesday’s rally was the precursor a shift in sentiment. The Volatility Index, VIX was not only down, but below 30, its 10-week moving average. The VIX should move opposite the market. Instead, it has been falling with the market, suggesting a lack of buyers rather than a concerted effort to sell.
In sharp contrast to how the market acted on Tuesday, yesterday’s rally was slow, gradually building steam throughout the morning. The futures were indicated to open lower, leaving no gap in the trading session. The S & P did struggle at 1040 – 1044 again, clearly worried about how much technical resistance might exist at that level. Because this level has been respected, it did prove to be an important catalyst. Therefore, as the market moved above 1040, it backed off to test it intraday. After a successful test, we saw a follow-through to the upside, which was an important move.
Earnings are expected to be the next major market-moving catalyst. This is a very light week for the economic calendar, which allows investors to focus on the more important picture. Meanwhile, “stabilization” has been a key factor in news out of the Euro zone. After months of disruptive news, the major swings have calmed down. That’s not to say that the economic prospects have gotten any better or that the austerity measures are any more accepted. It is to say that the news is pointing to more calm and less volatility. Many are awaiting the results of the “stress test” on European banks, but the widely held belief is that the banks will get a “passing” grade, although we won’t know the details of what exactly was on this test. The Euro has been our proxy for how the overall perception of the European bailout and austerity measures are going. The Euro has been doing well, rising over the past month from the multi-year low of 1.1877 to build a small base under 1.25. The resistance, in the form of a declining 10-week moving average came into play coincident with the 1.25 resistance. Last week, the Euro pushed through this level and then consolidated on top of the small base pattern. This is important, not only because the Euro strength and stability suggests a calming of the European economic condition, but it also helps alleviate the uncertainty as to where the exchange rate might be heading for companies with significant export business that were likely hurt by the rapid deterioration of the Euro this year.
State Street Bank STT (+9.9%) announced that it will beat second quarter expectations of 93c per share. That helped lift both regional banks and trusts, but also pushed up the major money center banks. The Financial Sector SPDR XLF (+4.4%) had edged slightly below the major February low of 13.51 on an intraday basis, but always managed to close above that level. Still, the index on the banks was hovering dangerously close to a 10-month low and was well below its key resistance at its 200-day moving average, now flat at 15. The 10-week moving average has dipped below the 200-day, also a negative sign. It has a lot of technical resistance above 14, all the way up to 15, but direction is as important heading into the earnings season. State Street provided the catalyst, but the rest of the industry carried the ball.
Tuesday’s bullish report from the SIA on chip sales for May provided an initial boost to the Semis. However, those gains faded and were part of the disappointment on Tuesday. There was little new news, but Tech stocks generally held up late Tuesday. Yesterday’s trading started off with slow, but steady gains. Since we expect solid profit margins to be the catalyst for positive action in that sector, we need to see the Semis act well. Yesterday, the Philly Semi Index SOX gained an impressive 5.1%, leading the Tech sector higher. In a somewhat related move, Retailers did well. This was all the more impressive because discount retailer Family Dollar FDO (-8.1%) showed disappointing earnings of 77c for the fiscal third quarter and lowered its full-year outlook. That fact that other retailers, especially teen and specialty retailers, shook off the bad news was a good signal to the market that the bad news has been mostly discounted. This has been our expectation for the earnings season. True, we’re starting off in a little deeper hole than I had expected, but the much anticipated earnings season is upon us and it is looking like there may be a few positive surprises in store.
One “denial” that came to light on Wednesday may have been the cause for the market sell-off of Tuesday. China’s State Administration of Foreign Exchange denied rumors as “unfounded” that they were mulling dumping US debt holdings. China holds nearly $2.5 trillion in US and other major currency issuer debt, which would make their exit from a position a major concern. It is also unclear as to why this might be the catalyst to the market giving back a gain of 170 Dow points midday. The biggest hit was taken in the small cap names. On the rally, bonds were seeing a strong bid. If rumors were that China might dump our bonds, I doubt we would have seen solid buy interest in our 10-year notes. Whatever the catalyst, Tuesday’s intraday gain did challenge 1040 on the S & P. Remember, 1040 was the low in February, May, and held in June. When that level broke, many jumped to the conclusion that it was a “Head and Shoulders Top” formation, which we vigorously refute. There is much more to such a pattern than the simple fact that the price action looks like a head and shoulders. The fact that the high, or the head, was confirmed by breadth, volume, leadership, and the Dow Jones Transportation Index negates the pattern from being a classic H&S top. Yes, 1040 was still a support point that was breached, but it did not generate a wave of stop loss selling, as many projected. Tuesday’s rally was the precursor a shift in sentiment. The Volatility Index, VIX was not only down, but below 30, its 10-week moving average. The VIX should move opposite the market. Instead, it has been falling with the market, suggesting a lack of buyers rather than a concerted effort to sell.
In sharp contrast to how the market acted on Tuesday, yesterday’s rally was slow, gradually building steam throughout the morning. The futures were indicated to open lower, leaving no gap in the trading session. The S & P did struggle at 1040 – 1044 again, clearly worried about how much technical resistance might exist at that level. Because this level has been respected, it did prove to be an important catalyst. Therefore, as the market moved above 1040, it backed off to test it intraday. After a successful test, we saw a follow-through to the upside, which was an important move.
Earnings are expected to be the next major market-moving catalyst. This is a very light week for the economic calendar, which allows investors to focus on the more important picture. Meanwhile, “stabilization” has been a key factor in news out of the Euro zone. After months of disruptive news, the major swings have calmed down. That’s not to say that the economic prospects have gotten any better or that the austerity measures are any more accepted. It is to say that the news is pointing to more calm and less volatility. Many are awaiting the results of the “stress test” on European banks, but the widely held belief is that the banks will get a “passing” grade, although we won’t know the details of what exactly was on this test. The Euro has been our proxy for how the overall perception of the European bailout and austerity measures are going. The Euro has been doing well, rising over the past month from the multi-year low of 1.1877 to build a small base under 1.25. The resistance, in the form of a declining 10-week moving average came into play coincident with the 1.25 resistance. Last week, the Euro pushed through this level and then consolidated on top of the small base pattern. This is important, not only because the Euro strength and stability suggests a calming of the European economic condition, but it also helps alleviate the uncertainty as to where the exchange rate might be heading for companies with significant export business that were likely hurt by the rapid deterioration of the Euro this year.
State Street Bank STT (+9.9%) announced that it will beat second quarter expectations of 93c per share. That helped lift both regional banks and trusts, but also pushed up the major money center banks. The Financial Sector SPDR XLF (+4.4%) had edged slightly below the major February low of 13.51 on an intraday basis, but always managed to close above that level. Still, the index on the banks was hovering dangerously close to a 10-month low and was well below its key resistance at its 200-day moving average, now flat at 15. The 10-week moving average has dipped below the 200-day, also a negative sign. It has a lot of technical resistance above 14, all the way up to 15, but direction is as important heading into the earnings season. State Street provided the catalyst, but the rest of the industry carried the ball.
Tuesday’s bullish report from the SIA on chip sales for May provided an initial boost to the Semis. However, those gains faded and were part of the disappointment on Tuesday. There was little new news, but Tech stocks generally held up late Tuesday. Yesterday’s trading started off with slow, but steady gains. Since we expect solid profit margins to be the catalyst for positive action in that sector, we need to see the Semis act well. Yesterday, the Philly Semi Index SOX gained an impressive 5.1%, leading the Tech sector higher. In a somewhat related move, Retailers did well. This was all the more impressive because discount retailer Family Dollar FDO (-8.1%) showed disappointing earnings of 77c for the fiscal third quarter and lowered its full-year outlook. That fact that other retailers, especially teen and specialty retailers, shook off the bad news was a good signal to the market that the bad news has been mostly discounted. This has been our expectation for the earnings season. True, we’re starting off in a little deeper hole than I had expected, but the much anticipated earnings season is upon us and it is looking like there may be a few positive surprises in store.