Relief Bounce Fails to Hold

SUMMARY:
- Relief bounce to the Wednesday selling fails to hold.
- Jobless claims end the streak at 15 weeks, provide the market some cheer, but in the end it was not enough.
- June Pending home sales rise but the cancellations are running at 4x the norm.
- Container ships show a further slowdown in progress.
- Friday Q2 GDP report may top expectations on inventories piling up, but that is not how you want to make your gains.
- Still in a trading range no matter how you slice it.  We just would like for it to hold.

MARKET SUMMARY

A nice-looking rally into lunch gets indigestion.

It was a bad session on Wednesday, and it looked like Thursday would be another bad session heading into the open. Futures were heading lower, but then there was a positive data point. The market was looking for something to grab hold of, and it grabbed onto the weekly jobless claims. 398K, stopping the streak of 15 weeks above 400K. It is hardly something to get celebratory about giving the other issues facing the economy and the country, but investors were looking for some positive news after such a bad Wednesday. They jumped on the better news and were able to rally stocks to the upside.

It was a good morning. Stocks moved higher, tested, and rallied nicely positive into lunch. It did not last, however. There was no big news that hit; all the big news was already out on the day. It was just more wrangling in DC about a debt deal. Stocks turned over and sold off into the afternoon. They failed a little bounce right before the close and tumbled lower, closing mostly to the downside. NASDAQ and NASDAQ 100 managed to pull off gains, but they were very modest compared to where they were.

NASDAQ, +0.05%; SP500, -0.3%; Dow, -0.5%, SP600, -0.2; SOX, -0.15%.

The losses from the day’s high were fairly precipitous. NASDAQ dropped 34 points off of its intraday high. The SP500 dropped 16 points. Toward the afternoon they had given up three quarters of their gains. They would have to have one heck of a stampede to the upside in order to salvage a decent session. They did not do that, obviously. There was a reversal of the big moves up that saw the SP500 tap the 50 day EMA on the high. Once again the indices found themselves right back in the middle of the trading range. Not necessarily devastating, but it is more indication that they are firmly entrenched in a trading range. Even though they are at some potential support levels, they are having one heck of a time holding any headway.

Wednesday was terrific decline on high volume; Thursday was an attempt to buoy. While volume was still decent, it was lower and the buyers lost. They were ahead, but they were way behind by the end of the session. If you did not look at the intraday action, you might say the market managed to hold its level after that loss on Wednesday so maybe it will kick up and move higher. What it really looks like is a continuation doji with selling. The wild card is this support level that is well etched out, and that provides the market with a shelf to try to bounce on. We will see if it does or not. It is clear to see that the indices are in their trading range. They gave up a second shot at trying to make a breakout. Now it is solely on the buyers once more to try to hold in and hold support or you will see the indices testing lower toward the 200 day EMA and even down to the prior lows in the range.

There was a smattering of other news out that told some of the story. Pending home sales rose 2.4% versus a – 2.4% drop or three% drop expected. It depends on which report you are looking at as to what expectations were, but they were not good. Pending home sales bumped. The interesting part is there are a lot of cancellations. A 16% cancellation rate versus the 4% that is the norm. There may be a lot of contracts, but the cancellations of those contracts are running at four times the historical levels. Also, a lot of the sales of what they are calling pending homes are refinancing. They fall under that, and there has been a lot of talk about loans being much higher than they have been in recent years. Last year it took the entire year to get to the level $1T in loans. We are already at the $1T in bank loans this year, but most all of them are refinancing. Where are the others going that are not refinancing? They are going to the large companies that are financing acquisitions. That is where the bulk of the $1T is, and we have seen a bunch of high-profile, high-dollar acquisitions announced this year.

Money is relatively cheap. The dollar is being shredded, so when do you buy? When do you pay off debts? When the dollar is not worth much? That is where the money is going. We can say things are a bit better, but why are they better? That is always the question. We will have that same question with GDP on Friday. Maybe it will be better than we initially thought because inventories are a lot higher than originally expected. That is not because factories are humming away and producing goods; it is because inventories are piling up. More on that later.

Credit Suisse had some nice views with respect to what it thinks a default or a downgrade would do. It said to expect a 30% decline in the markets if that happens. Wow. They said the bonds yields could drop to 2.75% if the unthinkable occurs   at least what they call unthinkable. The bond market does not seem to be too miffed by it. It had a bit of gain on Thursday, but it is not running wild either way.

Of course earnings were out, and you had the usual suspects announcing. It is just a mixed bag at this point. XOM’s results were strong, but it gapped lower. A lot of energy companies are struggling on their earnings because costs are higher and they do not want to be pegged with the notion of making obscene profits. If they announced big profit, they would be all over the screen and our fearless leaders in DC would be talking about how to confiscate those profits. Whether they are able to push costs higher or whatever, they were able to “miss” on earnings slightly and head lower. That seems to be helping them fly below the radar.

DD beat, but it did not do the stock any good. It rose a whopping $0.02 on the day. That is the kind of season it is now. We have been in earnings season. We got that initial bump on the numbers from IBM and AAPL and others. You can see the pullback in the range to the SP500, and then the sharp jump on those earnings. Now investors know the story. They have seen it, and the rest of the earnings are not impressive enough to send them to the upside. Therefore we had a selloff. It needed a little Viagra because it could not keep it up on the session. Now we are definitely mired back in the middle of the trading range.

FRIDAY

It is Friday already, and it will be an important one for several reasons. One reason is the ongoing budget deals. There is a vote tonight in the House of Representatives on Mr. Boehner’s plan for the budget, and it is not going to pass when it gets to the Senate. Oh well, this is all part of the game they have to go through to have a meeting of the minds. They also have to show the public that they are putting something out there. People say it does not mean anything, but it is important that they actually put something on the table to show they have done something and made a good-faith effort. Then they can work on it from there. I am not sure we even have to get a deal. Maybe it is good that we do not, and then we have to cut spending elsewhere. They say we are not going to default. So we do not default, but then we learn how to live more within our means. Yeah, that will happen. I think I saw some cats and dogs falling from the sky a minute ago.

It is a big day for GDP. Obviously important numbers with the first run at Q2. It is expected to drop around 1.7%. It might bump up as we saw in the discussion of the container ships and inventories. A bump up in inventories may push it higher. If it does not, then we know things are really bad. Then even a pile up in inventories could not help push GDP upside.

This is going to color the trade tomorrow. Nonetheless, we have a market with stock indices in their trading range. Very clearly established the trading ranges are in force with this last move. They may try to bounce again on a good number or any kind of number they want to cling to as they did today. But the momentum is down. It is just up to the buyers to step in at these levels and if they can deliver. I am not holding my breath. You have two tops and a failed breakout. The rulebook says they go back to the bottom of the range. Maybe they will and maybe they will not, the bias is definitely that way once more.

The wild card, of course, is the budget deal. An announcement of something positive will help the market. It could happen on the weekend, and they are saying it has to. Again, I am not sure that is the case, but if they want to say that, fine. That is the timetable they are working under. They will make it happen at least before the end of next week when they go home for recess because they do not want to miss that. They will get something done, and it will probably be something ugly that no one likes. It will probably be seen as a victory for the President because, unless the republicans want to shut down the government and get real cuts that actually mean something, then they will lose. If they do not get real substantive cuts that cannot be changed at a later date, then it is a loss as far as I see it. But I am no politico, so what do I know about these things?

I do know that the market is heading lower. If the GDP comes in bad, it could make the rest of the run to the bottom. That is great; I would just as soon get it over with. Let’s clear out the pipes a little and then try for another rally up in the trading range. Of course that is assuming there will be one. Again, we are in a trading range. Unless it proves otherwise, that is what we will play.

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com