Tension & Disarray at Market's Moment of Truth

Becoming accustomed . . . to repeated patterns? Don't become complacent about that, as this moves methodically to what we suspect will soon become a "moment of truth" for the market's at least short-term picture, per bifurcated factors we explored in last night's DB. Specifically, that is likely going to relate to Friday's Employment Report; leaving the Senior Averages positioned in a way to either fail or breakout to the upside, in the immediate wake of that data. While we already are fairly confident (and have forecast this for many months) that the economic is slowing, we've still got to address the majority of economists and market analysts who don't accept that the old cycle ended over two years ago for many multinational stocks, and not even yet for some techs.

As they increasingly realize how the specter of monetary ease down the road will stimulate new cycles (they're still focused on the old, which we think is inappropriate and well after-the-fact of it topping, and of course potentially amidst the bottoming processes for some of these areas), we'll get two distinct schools of thinking: one that would evacuate because old results and current Q3 numbers in some cases will pale by comparison with last year (or the last Quarter), and then the analysts who've agreed with us that the peaking of growth rates took place quite awhile ago, and thus will be interested in picking-up relative bargains as they are rotationally presented this year.

On top of everything; there is a coterie of analysts who thinks the secular bull dating from early in the 1970's is coming to an end, or has had a drawn-out process in that direction, ongoing for the many months of duress. Well they have some points; our own warnings back in the winter/spring of 1998 sounded those concerns, which is one reason we remained focused primarily in techs as an alternative (wise one too) to fighting the never-resolved (normally downward tilted) swings for so many of the older economy's stocks; while at the same time looking for the Internet swoons in the spring of 1999 until they were (working towards expected completions) during 2000. With the S&P Cash trading slightly above its 200-day Moving Average; and Dow Industrials below, it's not surprising that analysts can come-up with about 102 variations of how this resolves, for now.

There is little doubt that, besides talking about "fades" from mid-July into early/mid August, we'd be extremely bearish about certain aspects if there were fundamentals of a convincing quality to impress us. For instance, in the 1997/'98 scenario you had a much stronger A/D Line, until it did breakdown as then-projected, but you had a crowd of analysts who didn't concur with us about a real risk on the derivatives and debt side; something we had been absolutely concerned about.

This time, you don't even have (at least yet) the Dollar swooning, and there isn't the kind of more or less (at least to us) compelling bearish fundamental argument you can reach around and grab like you could if believing our view that the Asian Contagion was going to spread and impact us back then. Bringing that up before the heart of the disaster hit our market, elicited public ridicule as some of you will recall; and we'd be delighted to similarly warn if we saw something out there of such a dire nature to be so foreboding. Will China devalue or will a confrontation occur that is not on the radarscreens yet, of sufficient magnitude to impact the Dollar or something else that is so destabilizing to impact the markets? Might; but we haven't sufficient evidence to argue that as we did have back then. As a matter of fact, outside of some worrisome technical patterns that we have already explored, and will again; there are fundamental reasons to suggest most culprits of types that are impacting some companies, are more stock specific than they are market general.

Technically . . . where that leaves you is an upward "wedge" within a continuing downtrend, not a desirable pattern (normally) for the S&P futures, but if too many believe that (or assume that a triangle must get resolved negatively), you have weighting on the short-side, which means they might be in position to be run-in, such as on Friday when the Employment numbers come in; (we reserve the balance for subscribers; including how to recognize confirmation or denial of this).

Tape Tension

Even if the numbers are "market friendly", you'd probably fade an opening upthrust, and then get a pullback before it heads higher; so there are various ways to approach a bullish resolution. If at all worried about a collapse, we'd not take the chance, or use the first rebound to reverse Friday. Either way; with many strategists thinking the market won't do anything until September, we think that's ludicrous at this point. There is increasing tension on the tape, and you've got a narrowing of this triangular behavior (including this little upward wedge within a downtrend), which places a strong onus on the market to resolve this standoff, and fairly quickly. For the Dow Industrials we see something like a very narrow (in the grander sphere of things) jousting range; something like 10,500 to 10,800 or so, with a dramatic move of the market coming once we get a closing move out of this range. In any event, the "tension on the tape" is increasing exponentially, not drifting.

What that creates, interestingly, is a microcosm of the market's dilemma; the overpriced under a cloud, but with a silver-lining for the sector leaders, in that their next upward cycle lies out there; while many of the old cyclicals should benefit from the peaking of not profits, but interest rates; a factor that for many can help their forward outlook, just as it already has (the proximity just last week noted as a matter of fact in) the Dow Utilities. This condition is exactly how market internal conditions can actually improve (on an intermediate and long-term basis), while prices drop in an fairly unimpressive (meaning typical) late July / early August action, though not inspiring for that legion of momentum players who probably sold May's lows and bought July's breakout, which in almost every case of rangebound volatile markets (as has been this whole year basically), we've not had markets that reward "trend following" techniques most of those players like to embrace.

We observe and readily grant that this market action is not easy, but before this year started, we emphasized that it wouldn't be like some former years, and would require fading the rallies, then buying the fades. We are well aware of the characteristic of the S&P, the false breakout of July; called for in the Senior Averages (with corrections ideally preceding higher levels down the road) and current leadership of Dow Utilities, which is great, but not the stuff able to sustain optimism for a wide variety of issues. But again, nothing is a "lock" because if you have all this sentiment, of an increasingly nervous or negative "bent", and little fundamentally to sink ones teeth into, you migrate into a climate where not only a washout can precede a running of the shorts, but where you can actually form a sort of test of the spring lows; something historically seen in Augusts of ages long ago. Regular readers will recall our warning before the year began, that if we got our high in the late winter/early spring, Internet bubble-bursting and eventually tech-wreck (towards the end of declines, not the beginning), and a May low for instance, that a test in roughly August would not only be possible, but about the normal duration between an important low and a test.

It's against the backdrop of an ominous chart pattern everyone sees, that we point this out ahead of Friday, and before the resolution of this ongoing action, which we agree is fraught with peril. It is important to look back at last week's action, where we had a mini-climax or slight washout (at a minimum an outpouring of negativity), and then no follow-through. Suppose that even Friday's numbers were not market friendly, and the market broke, but then had little follow-through early in next week's going. That's the kind of situation one has to be prepared for in these fast markets of course; though for now we're sort of thinking this market sets-up for a rally, not for a disaster. (One reason we were able to capture the guideline efforts this week, was the near-universal shift to bearishness late last week, which set-up a rebound in our view regardless of what came later. In that regard the 900.933.GENE hotline and the DB's have identified the odds of early rallies.)

Unfettered Disarray

Interestingly, with NASDAQ under modest pressure again, and the Nasdaq 100 (NDX) just now sitting on top of its 200 day moving average, we're hearing lots of worries about techs breaking down further. In fact very early last month we indicated some further correction would be seen in late July or even into very easily into early-mid August in the sector, after we got our "confirmed" breakout for early-mid July, that got too many too bullish into what was described as a "false breakout", that needed to test at least moderately before coming up anew. Well, in some areas that's all it did; in others a little bit of nastier action than we had in mind occurred; though that's not seasonally abnormal this time of year. (We thought given the pounding earlier in the spring, that it would not be necessary to completely pummel stocks again this late summer and fall, and it may yet be shown that what we're seeing is a test by the big-cap techs, while the small stocks basically are exhausted and drifting in varying patterns best described as ongoing disarray.)

We have been suspicious of several aspects of the decline nevertheless, as you know. One very looming factor is the history of markets bottoming in May (not October per popular misconception of a more modern phenomenon that we ourselves essentially nailed in several such instances); a consolidation upwards, and then a test in late July/early August, that often concludes pressures. It is too early to argue that with any degree of surety yet; (with the balance reserved for readers).

One of the most expensive sectors during the expected spring-back from this year's lows, rapidly became the Semiconductors (SOX), which actually went parabolic at an unsustainable clip this past June, and hence (though we love the sector for a decade, and probably the next decade as an overall beneficiary of so many changes that effect our lives and products in inestimable ways) were due to correct. They've done that somewhat; and now are fiddling in the vicinity of their 200 day Moving Average; a break of which would probably "confirm" bearishness to some, and likely actually have the effect of concluding the selling in a washout or (balance reserved for readers).

Technicals; Economic News; Bits & Bytes and Daily action . . . (are normally reserved areas) that have identified several key intraday rallying parameters and resistance zones, almost on the nose incidentally, from the week's start, with the first dip being bought each morning as far as the (900.933.GENE) hotline guidelines are concerned, (and the outcome of this is debatable, but as it is a forward theory on how to recognize the determination; must be reserved for subscribers).

Rotational Deckchairs

Concurrently, talk continues about rotational characteristics; that worry some technicians, and that we've been observing. Those same qualities are really the only chance the market has here to avoid general implosion, because of the lack of seasonal "contributions" this time of year, and the general worrisome sort of atmosphere that otherwise prevails. Simply put; you cannot bring the Senior Averages back, when it counts, without taking money from technology; at least not this time of year, and you probably can't have sufficient new leadership from Utilities. Once you bring those Averages into sort of an equilibrium, if this can be accomplished impressively (such as outlined in technical and daily thoughts), then you have the opportunity to lift the very stocks many managers would typically prefer to invest anew in; though numerous factors will continue to complicate matters, in what looms still as the price to be paid for a world that migrated gently into Y2k, hence put pricing pressures on everything from Energy to foodstuffs, very much as forewarned before the year began. At the same time the monetary environment should continue to improve, making excess bearishness at this point on the year's final portions not a "lock" in any way; though this week will remain tricky, and Oil has most recently been firming again, as inventory's have shrunk, which brings into at least short-term question the duration of the drop.

In summary . . .the monetary environment remains friendlier, in our view, though surely there is precedent for markets that decline in the face of favorable earnings; when growth rates erode. The LEI numbers were really pretty benign for the timeframe taken, and the 3.2% slide in home sales contributed to the specter of a slowing U.S. economy. T-Bonds firmed only slightly on that. (It can even be argued that wider spreads in the debt markets, which normally might be bearish, aren't in this environment, because of the ongoing and forthcoming Government bond shortage.)

Plus of course you have a market conditioned, as we discussed frequently, to be still wary during most early August action. Our thinking centers around already-seen and ongoing traumas in the market, but is not going to be so optimistic as to suspect a stock market not capable of dropping if enough managers don't grasp that misplaced fundamental optimism for this year's results late last year, or early this year, don't have to equate with next year; though it may if emotion triggers flat-out recession fears, which it continues borderline on doing. Our ideal call this week was for a several barely sustainable rallies not of a particularly successful demeanor, and we sure got it. (Forward comment reserved.) However, that's the orthodox call, and doesn't take-into-account what would happen if the shorts got run-in Friday, as outlined here tonight. So far the market's mixed; S&P and DJIA looking relatively firm compared to NASDAQ.

The McClellan Oscillator eased to a reading of -102 Friday; worked into slightly oversold before this bit of a turn, which has the Mac around a reading of -22 or so today. Though we do expect a new rally again Thursday (once more into the breech), Wednesday's final effort was a short (as far as the S&P, and covered), following successful longs as has been the intraday case daily this week so far; thus we went flat again ahead of Thursday, on the 900.933.GENE hotline (long into the early weakness Thursday). As of 8:05 p.m. Wed, Globex S&P premium's 1170; firmer by 200 than this time last evening, but nevertheless with futures down about 200 from Chicago's regular close, which firmed after the NYSE close today. We'll buy an early purge again on Thursday.