- Indices go nowhere, but that in itself is a degree of victory for the upside.
- Overall market may have been flat, but leadership enjoyed a sixth day of rallying.
- Moody’s downgrades Portugal four notches in one move. A foreshadowing of the US’ treatment?
- Chinese banks receive a warning from Moody’s.
- Factory Orders rebound, not as much as expected, but revisions help.
- 2M jobs created? Let me tell you about that . . .
- Avoiding a selloff is a good initial step, but market is still in the Missouri mindset.

MARKET SUMMARY

A mixed close is for now a good close.

The market managed a push on Tuesday. That is not necessarily a bad thing given some of the worries we had coming into the SP500′s test of that February peak. SP500 and the Dow finished off for the session, but that was not the problem across the market. The NASDAQ posted a decent 0.3% gain. It edged its five-day lateral rally into a six-day stretch, reaching up toward the February peak.

One scenario was the possibility that the market would sell off sharply as Q3 really got underway, similar to what it did in May and June. That is not the case, at least not through the first two days of July. There was a modest pullback but nothing serious. There was more profit taking after a five-day run to the upside, and it was a substantial run to the upside even if volume did lag. It is summertime after all and a holiday week, so you would expect volume to be light. That does not diminish the nice price gains, but it leaves the market somewhat susceptible to a rollover at a key resistance point such as the February peak and the late-May/early-June peak.

The action did not answer the questions we had moving into the session. It eliminated one (at least for now), and that was the immediate rollover with sellers swarming back. That obviously did not happen. Now do we get a modest two-to-three day fade and then a renewed bid to the upside to try and take out that February peak? Or is there a pullback that just fades and then ultimately falls to the downside? Of course there is that third scenario of a break back to the upside after a day off. That could always happen. Maybe investors are convinced that the economy is on the mend after the ISM and Chicago PMI last week. Now they feel they can just throw their money down. Perhaps that is the case. It could also be that we saw some first-of-the-month buying on Friday and then some initial profit taking on Tuesday. Maybe it will turn into deeper selling. There were some buys that were enticing enough to lure me into the upside on Tuesday, although I would have preferred to wait a couple of days to see if the market move would be a gentle test, like a 1-2-3 pullback that leads to a break higher.

When I talk about a 1-2-3 pullback, look at NTGR. That is exactly what it showed, and it was breaking to the upside on Tuesday. Here is the Wednesday, Thursday, and Friday fade after that strong Tuesday breakout from the triangle, and then volume kicked back up above average on Tuesday as the stock moved higher off of the breakout test. That is what I would look at for the market overall, though it would not be a breakout. It would nonetheless be a situation where a little flag pattern right below resistance could lead to the upside break. Again, that is if investors are convinced that now it is time to put money back to work because economic nirvana must be here.

I would not say that economic nirvana has hit once again not based on what I saw Tuesday, and also not because of what we saw last week. A lot of the decisions will be delayed until Friday with the jobs report, but on Tuesday it was not that great. Factory orders for May rebounded to a 0.8% gain. That was less than the 1% expected, but it was a vast improvement over the -0.9% loss from April that was revised from a -1.2% loss. There is no problem with that at all.

On the other hand, Moody’s said it may have to downgrade China because of its bank exposure. In other words, it was saying the Chinese banks may require a bailout of their own in the future because they are too extended and a lot of the real estate market there is illusory. Gee, where have we heard that before? I have reported in months past about the vacant buildings there similar to the ghost towns in Arizona and other places that were built but that no one has ever lived in. There are ghost buildings in China that no one has ever occupied. Moody’s says they have the same problem, and it jives with what I have heard from people who have been there and know something about the Chinese real estate market.

On top of that, Moody’s downgraded Portugal. It was not just a notch either; they jumped four notches down to junk. That reminds me of “A Christmas Story” where Schwartz made a breach of etiquette by skipping the “triple dare you” and going straight to a “triple-dog-dare.” Everyone seemed to overlook it, and everyone seems to have overlooked it on Tuesday when Moody’s downgraded Portugal. Everyone seemed to ignore it, and the market rallied nicely. We kicked that can successfully down the road, but you have to wonder if this will happen to the US. We have already been warned by some of the credit rating companies that if we do not raise that debt limit and the US defaults, they will reduce us to D overnight. It may be a breach of etiquette there as well, but the precedent has been established.

On the day, things were soft early on. They got a bit softer at the open but managed to rally off the mid-morning lows and turn positive in the afternoon. There was up and down chop in the afternoon. Even though there was good run into the last hour, SP500 was ultimately unable to hold the gains into the close. It was just the large cap NYSE indices that had the problem. NASDAQ, +0.35%; SP500, -0.13%; Dow, -0.1%, SP600, +0.35%; SOX, -1%.

The SOX is very important to watch moving forward because the semiconductors led the move to the downside. They lagged the move to the upside until they caught fire Thursday and Friday. They totally did not participate in the move on Tuesday. It does not mean they totally rolled over. They held the 200 day EMA and bounced somewhat, but this group warrants watching as we try to define whether the market is going to rally again after a short pullback or if it will roll over and sell once more.

WEDNESDAY

It is a short week, so the market data will be compressed. It is already Wednesday, and we will have the Challenger job cuts and ISM services. Challenger has been favorable with respect to the jobs report because announced job cuts have been declining month after month. That is good. There will not be huge decreases in announced job cuts, but they will still be lower. That is a positive. At least we do not have massive job bloodletting anymore. We are in position to have job gains we just actually have to have them. That is something we have been unable to pull off just yet. Thursday we get ADP, and that will get things heated up. Tomorrow will bring some pretty good news. We also have to watch out for earnings. There was nothing today on the earnings front. No warnings, not much of anything. Again, that tells me we will likely have a decent earnings season ahead. I believe that is one reason it was moving last week.

We have had a day of rest. The NASDAQ was up, but it was really not a big day. It was coasting on some momentum. We picked up a few upside and downside plays just because they looked so good, but the market has not shown what it will do yet. The fact that it did not roll over was a positive. The sellers did not swarm in and hack it to pieces as they have done in the past. We will have to see if we get a 1-2-3 pullback or if we get something that erodes away and sells back down to the bottom of the range.

Very encouraging to see the leaders post such solid gains on a flat market. Very positive for the market. We will have to see if the market will continue to build on that. We do not want it to go too fast. I would love to see a couple more days of just a slight tail a little fade like I talked about in NTGR with its little pullback before it shot to the upside. That is what you like to see. Just a breather to take some time to show everybody that we know where support is, we know where we are, and we are still going higher, thank you very much.

We will still be ready to play the downside. There are some stocks in great shape to roll over. If it does top here, there will be some great entry points with good risk/reward. We will not shy away from those if it looks like the market will sell. This is the point that is tricky. It is a “Show Me Market.” We had one day of pullback on SP500. We could get a couple more of these. Sometimes it gets a little uncomfortable and looks like it will sell. That is called the shakeout. It gets the people who are piling in on the last few days to sell out because they think it is topped out at this resistance and is going back down again. It could very well be the case. This is not a great pattern; this is just a mess. Indeed, if you really focus on it, you could say we could be developing that head and shoulders. That is what we have to watch out for.

A sharp break to the downside is not necessarily a good thing not at all, because you are at the top of the range and are dumping back over. We are still in the “show me” part of this. We are letting our good upside positions run, and they were running well today. I do not want to be blinded by that. It is a positive, but they could just be on their last gasp themselves before they pull back. We will see. We have taken some great gain on the way up. We are keeping reasonable stop losses on them. If the market wants to take them out, it will do so. If the market wants to roll over, it will, and then we will move into our downside plays. We will lighten up on the upside at the same time because the market will take us out.

We have had a great run, and we will preserve that gain. We will see if we get a mild pullback and then the opportunity to buy more to the upside, or if it is time to say it was a great relief rally. We can say we enjoyed it and made some good money, and now it is time to play the downside. The market will show us soon enough what it will do at this point.