- No bounce following the Friday selling.
- SP500, DJ30 holding decently, but the growth indices are struggling as some key leaders roll.
- Dollar backs off some but commodities sell anyway.
- New York Manufacturing falls by nearly half.
- Upside in the position of having to prove it can prevail as NASDAQ, SOX settle in for more of a pullback.

MARKET SUMMARY

Tennis match goes advantage sellers.

The buyers could not volley back from the Friday selling as was the case all last week in a back and forth above the 50 day EMA and below the February peaks.  More than that, NASDAQ and SOX undercut the 50 day EMA though SP500, DJ30 easily held above that level while SP600 held but flopped to that level.  More indications the sellers have gained the upper hand in the market the past couple of weeks.

DJ30 is cruising, forming a pennant as it does what the other indices cannot, that is hold its breakout.  Ah the beauty of an index filled with multinationals in a declining dollar environment.  SP500 held the 50 day EMA, doing what it has to do and indeed forming a small ABCD pattern.  It has left itself little margin for error, however. 

As noted, NASDAQ fell through its 50 day EMA as some key stocks broke lower.  AAPL continued its Friday selling.  AMZN was tagged with a role in the attack on Sony as its cloud service was used as a launching point. I am likely showing my ignorance, but from the first time I heard of the ‘cloud’ I was very concerned about just this sort of event and worse.  It is so apparently new and hackers are so diligent in exploiting weaknesses.  Anyway, this news reverberated, though quietly, through techs.  The newest growth area was revealed to have the same old security issues that each new expansion in technology suffers, and technology likely has to digest this before it makes a new move.

TUESDAY

Housing Starts are out in the morning, but they mean so little at this juncture given the huge inventory and shadow inventory levels.  They should be close to zero but they are absurdly high.  Maybe it is appropriate; after all in China there are reports of entire mini cities of office buildings that are empty.  They are built with government subsidies, and after completed, new construction starts at another location with more subsidies.  And at the same time the Chinese government is supposedly trying to slow its economy by raising bank reserve requirements?  Something is absurdly out of whack, but China is governed by communists and any government that interferes too much makes stupid decisions. 

Industrial production and capacity are out as well.

The data is important, but as noted over the weekend, the market is in a technical mode right now given the Monday breaks lower by some key indices and stocks.  During consolidations or modest pullbacks the news can break the market one way or the other.  Monday the growth indices started to break lower and it likely would take more than production and capacity to change the direction. 

Indeed, NASDAQ, NASDAQ 100, and SOX look weak.  On the other hand SMH (a broader semiconductor ETF), looks fine as does DJ30 and to a lesser extent SP500.  Of course that is usually the way it works right?  Some indices breakout before others follow and some break down before the others follow. 

Right now from my perspective the sellers have the advantage and it is more than just a back and forth volley as it was last week.  The sellers ‘got hand’ as George Costanza of ‘Seinfeld’ would say, i.e. gaining control of the situation.  The question is whether there is serious selling ahead or just a consolidation before another attempt at moving higher.

NASDAQ and SOX appear to have some work ahead of them, even the small caps.  Mid-caps and the Dow as well as SP500 look fine for now.  If the growth indices just need some more consolidation (meaning the inverted head and shoulders from February to April was not enough), then the mid-caps and large cap NYSE indices can hold and renew the breakouts with the growth indices following.

Problem is, the growth areas just broke out from the base and failed to hold it.  They had all they needed to make the move and they cannot do it.  Perhaps they are simply rotating out of leadership roles in favor of the large cap NYSE.  Even so, that is not a good development as those appear to be more export stocks, selling to overseas growth versus home-grown businesses feeding US demand and creating new technology that creates new demand as the US has ALWAYS done.  It is NOT GOOD ENOUGH to simply be an export nation and feed growth economies while ours languishes.  That DOES NOT PRODUCE a higher standard of living.  We are going to be the first generation that hands our descendants a lower living standard if we do not once again develop our smaller businesses that create our new technologies and services that drive our standard of living higher.

That is longer term and something of a digression.  It is VERY important longer term but for the short term we are moderately negative because there has been a character change.  The indices put in a good base, broke higher, and cannot hold the break.  That is new for this rally out of the summer 2010 base.  It has been in the works for a couple of weeks and we took gain on the way up, took positions off the table as they struggled, and unfortunately took some new positions on the last test .  . but they have not bit us for the most part.  At the same time we naturally started taking downside positions as they appeared, and now we have several that are nicely in the money and will likely have others set up as well.

The market can always shake off a funk such as this.  After all it is not much of a selloff, and the right news can stop the bleeding before it gets bad.  Again, however, the failure to hold the breakout and now the failure to hold the consolidation is something new since August 2010.  That in itself warrants some caution and thus we are not too eager about loading up on the upside even though there are still good looking patterns.  IF they do break higher, we can take some partial positions; I don’t want to rush into most upside positions at this juncture.  If that changes I will be in good shape because I will have been taking partial positions when the opportunity arose and then will get another shot if I am patient.

Patience is key.  Don’t take big positions all at once right now, don’t chase, just take opportunity as it is there and if things go against you, get out to try again on another day.