Archive for June, 2006|Monthly archive page

Spinning on an Axis

Traders,

World spinning round
To the next revolution
Sun going down
Gonna rise up again
Paul McCartney, “Spinning on an Axis”

Our current position:

BUYERS’ EDGE IMPROVED

In this week’s edition you will find:

  • Where We Are
  • What Was Important About Last Week
  • What We Are Watching For This Week
  • A Word On Discipline

The following sections are on our home site:

Where We Are:

Taking a look at the broader market:

Price action on the major exchanges consisting of high volatility that ultimately led to little change in values left us with just one thing to go on.

We have a bullish Follow Through Day in the books, which gives us an indication that institutional support for this market is present.

But with little corporate or economic news over the week, much of market player psychology is fixated on the Fed’s rate decision due Thursday.

As most charts show holding patterns for the week, there is little to discuss.

The 10-year Note yield continued to move north of a multi-year trend line, which posses major threat to equities. But if a widely anticipated rate hike comes through it may alter the course here.

Technically speaking:

The Dow Industrial Average
($INDU), -0.2%, is consolidating beneath its 50-day moving average.

The S&P 500
($SPX), -0.6%, is consolidating beneath its 200-day average.

Nasdaq
($COMPQ), -0.4%, is consolidating considerably below its 200-day moving average.

Russell 2000
($RUT), -0.4%, is also consolidating beneath its 200-day average.

Volume indications gave us a bullish Follow Through Day Thursday.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 10-year Note Yield
($tnx) hit a new high. This move puts decisively above a major trendline, which is a bearish sign for equities.

The U.S. Dollar Index
($USD) moved convincingly above its 50-day average, though remains beneath its 200-day average.

The Gold Miners Index
($XAU) is consolidating at its 200-day average after rebounding from last week’s lows.

The Dow Jones AIG Commodity Index
($DJAIG) is consolidating beneath its 200-day average.

Consumer Staples
($CMR) is consolidating beneath its 50-day average and above its 200-day average.

Consumer Cyclicals
($CYC) is also consolidating beneath its 50-day average and above its 200-day average, though holds a weaker relative strength position than the staples.

Technology
($DJUSTC) is consolidating considerably below its 200-day moving average.

The Semiconductor Index
($SOX) >) is also consolidating considerably below its 200-day moving average.

Banks
($BKX) >) is consolidating considerably below its 50-day moving average.

Broker Dealers
($XBD) is trading just above its 200-day moving average.

Retail
($RLX) >) is consolidating considerably below its 200-day moving average.

Healthcare
($HCX) >) is consolidating below its major moving averages.

Biotech
($BTK) is consolidating below its major moving averages.

REIT’s
($DJR) is consolidating below its 50-day moving average.

Homebuilders
($DJUSHB) is consolidating below its major moving averages.

Transportation
($TRAN) closed above its major moving averages.

Airlines
($XAL) closed above its major moving averages.

Defense
($DFX) closed above its major moving averages.

Energy
($IXE) closed above its 200-day moving average.

Utilities
($UTY) is consolidating along its 50-day and 200-day moving averages.

The top 10 industry groups from the 6 month RS screen are:

  1. STEEL IRON
  2. DRUG RELATED PRODUCTS
  3. INTERNET SERVICE PROVI
  4. TRUCKING
  5. AIR DELIVERY FREIGHT S
  6. MACHINE TOOLS ACCSORIE
  7. SPECIALTY RETAIL OTHER
  8. AUTO PARTS
  9. ADVERTISING AGENCIES
  10. MOVIE PRODUCTION THEAT

What Was Important About Last Week

STOCKS:

  • Oracle Corp (ORCL) reported Q4 (May) earnings of $0.29 per share, $0.01 better than the Reuters Estimates consensus of $0.28; non-GAAP revenues rose 21.7% year/year to $4.94 bln vs. the $4.76 bln consensus.
  • Morgan Stanley (MWD) said its net income more than doubled in the quarter ended May 31 to $1.96 billion, or $1.86 a share, from $928 million, or 86 cents a share, last year. Revenue rose 48% to $8.94 billion from $6.03 billion.
  • FedEx (FDX) reported that earnings in its fiscal fourth quarter jumped 27% from the same period a year ago, rising to $568 million, or $1.82 a
    share, from $448 million, or $1.46 a share. Revenue rose 10%.
  • Bed Bath & Beyond (BBBY) reported Q1 (May) earnings of $0.35 per share, in line with the Reuters Estimates consensus of $0.35. Total revenues rose 12.2% year/year to $1.4 bln vs the $1.39 bln consensus. Comparable store sales in Q1 increased by approx 4.9%, compared with an increase of approx 4.4% in 1Q05.
  • Jabil Circuit (JBL) reported Q3 (May) earnings of $0.36 per share, a penny better than the Reuters Estimates consensus of $0.35 but a penny shy of the First Call consensus of $0.37. Co issued mixed guidance for Q4, sees EPS of $0.30-0.35 (consensus $0.41) on revenues of $2.75-2.95 mln (consensus $2.69 bln). For FY06, co sees EPS of $1.47-1.52 (consensus $1.57) on revenues of $10.1-10.3 mln (consensus $9.98 bln).
  • UTStarcom (UTSI) reported a Q1 (Mar) GAAP loss of $0.09 per share, $0.60 better than the Reuters Estimates consensus of ($0.69). Revenues fell 33.9% year/year to $596.6 mln vs. the $520 mln consensus. Co issued upside guidance for Q2 (Jun), sees a loss of $0.45 to a loss of $0.55 vs. an expected loss of $0.43, and sees Q2 (Jun) revenues of $545-575 mln (consensus $584.23 mln).

ECONOMY:

  • Housing starts jumped 5% in May to a
    seasonally adjusted annual rate of 1.957 million, reversing a three month slide.
  • First-time claims for unemployment benefits increased by 11,000 to a seasonally adjusted 308,000 in the week ending June 17. The four-week moving average of new claims decreased last week by 5,000 to 311,250.
  • The Conference Board said its index of leading economic indicators declined 0.6% in May.
  • Japan’s economy minister, Kaoru Yosano, said in an interview with The
    Wall Street Journal that the Bank of Japan would likely abolish its
    zero-interest rate policy before the end of the summer.

What We’re Looking For This Week

Key earnings releases:

  • MONDAY: Lennar Corporation (LEN), Walgreen (WAG).
  • TUESDAY: Nike (NKE).
  • WEDNESDAY: 3Com Corp (COMS), Biomet, Inc. (BMET), Micron Technology (MU), Paychex (PAYX), Red Hat, Inc. (RHAT).
  • THURSDAY: Constellation Brands, Inc. (STZ).
  • FRIDAY: none

On the economic front we have potential market movers with:

  • MONDAY: New Home Sales,
  • TUESDAY: Consumer Confidence, Existing Home Sales
  • WEDNESDAY: Crude Inventories,
  • THURSDAY: Chain Deflator-Final, GDP-Final, Initial Claims, Help-Wanted Index, FOMC policy statement
  • FRIDAY: Personal Income, Personal Spending, Mich Sentiment-Rev., Chicago PMI

The Following Sections Are On Our Home Site:

This Week’s Word On Discipline:

“Every serious-minded person knows that a large part of the effort required in moral discipline consists in the courage needed to acknowledge the unpleasant consequences of one’s past and present acts.” – John Dewey

Take time with a wounded hand

Traders,

Take time with a wounded hand, ’cause it likes to heal
Take time with a wounded hand, ’cause I like to steal
Take time with a wounded hand, ’cause it likes to heal, I like to steal
Stone Temple Pilots – “Creep”

Our current position:

SELLERS’ EDGE INTACT

In this week’s edition you will find:

  • Where We Are
  • What Was Important About Last Week
  • What We Are Watching For This Week
  • A Word On Discipline

The following sections are on our home site:

Where We Are:

Taking a look at the broader market:

The Bull Market that began in ’03 has been scarred deeply with blood red selling over the past several weeks.

But with the shape of most sectors far from a recognizable Bear Market, we’re looking for signs of resuscitation.

Thursday’s massive upside move was matched with heavy buying. While too soon from Wednesday’s key low to be considered a valid Follow Through Day (FTD), many sectors the attempted reversals from obvious trend-lines. Most notably, the S&P 500.

For the record, a FTD occurs after four days from a low, and within no more than seven days. It is marked by heavy volume with at least a 1.7% price gain. This tells us institutional money is supporting the market. The four day wait omits misreading any heavy short covering as real buying.

Recent buying of safe haven Consumer Staples resulted in a gain for the Dow Industrials, while riskier asset classes in the Technology sector sustained modest losses.

Should the Bull receive its life support from institutional grade buying, we expect a trend of defensive posturing with safe haven stocks to continue. Later stage Bull markets have historically supported them.

We’re also watching the 10-year Bond Yield as a potential threat that could create a significant shift in sentiment . A decisive move above a multi-year downward trend line would give us evidence of this.

As The Growth Stock Report specializes in growth stocks, we continue to keep a tight watch on that market.

Nic Inc. (EGOV) is an example of a growth stock that meets our strict fundamental criteria. It’s success or demise helps us determine the pace of others in the category.

EGOV: provides eGovernment services that enable governments use the Internet to provide various services to businesses and citizens in the United States.

Market Cap: 437.73M
Employees: 305
Qtrly Rev Growth (yoy): 39.60%
Revenue (ttm): 63.71M
Gross Margin (ttm): 48.84%
EBITDA (ttm): 18.36M
Oper Margins (ttm): 25.91%
Net Income (ttm): 10.18M
EPS (ttm): 0.165
P/E (ttm): 43.33
PEG (5 yr expected): 1.55
P/S (ttm): 6.70

EGOV is breaking out of a classic two-year base and show’s promise with recent institutional grade buying. Our initial profit target of 20% is set at 8.04. This is from a breakout buy at its pivot of 6.70.

Though stocks under $15 have a tendency to under perform those above, stocks setup like EGOV have a tendency to hit the $10 mark.

Technically speaking:

The Dow Industrial Average
($INDU), +1.1%, has rallied sharply to back above its 200-day moving average.

The S&P 500
($SPX), -0.1%, remains below its 200-day major moving average as it holds a multi-year trend line.

Nasdaq
($COMPQ), -0.2%, continues to trend below its 200-day moving average.

Russell 2000
($RUT), -1.2%, reversed to just under its200-day average mark.

Volume indications distribution across the major exchanges continues to weigh to the bear’s favor, though Thursday’s upside surge is poised to set a new tone.

Hi/Lo Ratio continues to post in negative territory.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 10-year Note Yield
($tnx) is back above its 50-day moving average, and threatens to launch decisively above a long-term trend line.

The U.S. Dollar Index
($USD) is hugging its 50-day moving average, poised to breakout of a cup-and-handle. Though a bullish looking pattern, overhead resistance makes it prone to failure.

The Gold Miners Index
($XAU) is just under its 200-day major average as it comes off major support around 120.

The Dow Jones AIG Commodity Index
($DJAIG) closed the week on its 200-day moving average. No pattern bias evident.

Consumer Staples
($CMR) reversed to its 50-day moving average in a show of the week’s top relative strength.

Consumer Cyclicals
($CYC) ducked just under its 200-day moving average before closing out above this mark.

Technology
($DJUSTC) is trending well blow its major moving averages.

The Semiconductor Index
($SOX) is also trending well below its major moving averages.

Banks
($BKX) are now above its 200-day averge, and below its 50-day average. The dominant trend remains up.

Broker Dealers
($XBD) closed just under the 200-day average, leaving a bullish spike from a long-term upward trend-line.

Retail
($RLX) moved slightly above the 200-day average before closing just below this mark. The long-term pattern for the sector show no bias with continued consolidation.

Healthcare
($HCX) continues to consolidate below its major moving averages. The trend is down as the 50-day sits beneath the 200-day.

Biotech
($BTK) also continues to consolidate below its major moving averages. The trend is down as the 50-day sits beneath the 200-day.

REIT’s
($DJR) appear to be forming a bullish inverted head-and-shoulders on the daily chart.

Homebuilders
($DJUSHB) continues to bea leader to the downside.

Transportation
($TRAN) is parked just below its 50-day moving average as it holds a bullish up-trend.

Airlines
($XAL) closed n its 50-day and 200-day averages, as the prior threatens to sink below the later.

Defense
($DFX) undercut its 200-day average before closing just below this mark.

Energy
($IXE) resumed to position above its 200-day average after testing below.

Utilities
($UTY) continue to trade near the upper-portion of a 10-month range, forming a bullish looking base.

The top 10 industry groups from the 6 month RS screen are:

  1. DRUG RELATED PRODUCTS
  2. MACHINE TOOLS ACCSORIE
  3. STEEL IRON
  4. INTERNET SERVICE PROVI
  5. SPECIALTY RETAIL OTHER
  6. CATALOG MAIL ORDER HOU
  7. ADVERTISING AGENCIES
  8. AUTO DEALERSHIPS
  9. MOVIE PRODUCTION THEAT
  10. AUTO PARTS

What Was Important About Last Week

STOCKS:

  • Microsoft (MSFT) founder and Chairman, Bill Gates, will transition out of a day-to-day role in the co to spend more time on his global health and education work at the Bill & Melinda Gates Foundation.
  • Oracle Corp (ORCL) preannounced Q4 results above consensus and prior guidance. Co sees Q4 non-GAAP EPS of $0.29 (consensus $0.27), up from prior guidance of $0.26-0.28.
  • Adobe Systems(ADBE) reported Q2 (May) earnings of $0.31 per share, a penny better than the Reuters Estimates consensus. Revenues rose 28.1% year/year to $635.5 mln (consensus $644.9 mln).
  • KB Home (KBH) reported Q2 (May) earnings of $2.46 per share, $0.03 better than the Reuters Estimates consensus of $2.43.
  • Cardinal Health (CAH) reaffirmed that FY06 EPS is expected to be in the upper half of a previously provided range of $3.30 to $3.55, excluding special items.reaffirmed that FY06 EPS is expected to be in the upper half of a previously provided range of $3.30 to $3.55, excluding special items.
  • Best Buy (BBY) said its fiscal first-quarter
    profit jumped 38% as customers shelled out for big purchases like flat-panel
    televisions. Best Buy earned $234 million, or 47 cents a share, in the
    three months ended May 27, up from $170 million, or 34 cents a share,
    during the same period last year. Revenue surged almost 14%.
  • Lehman Brothers (LEH) said its earnings shot up 47% in its fiscal second
    quarter amid strength in its capital markets and investment-banking
    businesses. Net income was $1 billion for the period ended May 31, or $1.69 a
    share, compared with $683 million or a split-adjusted $1.13 a share a
    year ago.

ECONOMY:

  • Core CPI data posted a third straight 0.3% increase. The rate of increase in the core rate the past three months was 3.8% and the year-over-year increase in the core rate rose to 2.4%.

What We’re Looking For This Week

Key earnings releases:

  • MONDAY: CarMax, Inc (KMX), Circuit City Stores Inc. (CC),
  • TUESDAY: Apollo Group (APOL), Christopher & Banks (CBK), The Kroger Co. (KR).
  • WEDNESDAY: Bed Bath & Beyond Inc. (BBBY), Darden Restaurants (DRI), Jabil Circuit, Inc. (JBIL).
  • THURSDAY: Family Dollar (FDO), Oracle (ORCL).
  • FRIDAY: none

On the economic front we have potential market movers with:

  • MONDAY: none
  • TUESDAY: Building Permits, Housing Starts,
  • WEDNESDAY: Crude Inventories
  • THURSDAY: Initial Claims, Leading Indicators
  • FRIDAY: Durable Orders

The Following Sections Are On Our Home Site:

This Week’s Word On Discipline:

“Habit is habit and not to be flung out of the window by any man, but coaxed downstairs a step at a time.” – Mark Twain

The Faces Of Things

Traders,

Facts are simple and facts are straight
Facts are lazy and facts are late
Facts all come with points of view
Facts don’t do what I want them to
Facts just twist the truth around
Facts are living turned inside out
Facts are getting the best of them
Facts are nothing on the face of things
Facts don’t stain the furniture
Facts go out and slam the door
Facts are written all over your face
Facts continue to change their shape
The Talking Heads, “Remain In Light”

Our current position:

SELLER’S EDGE INTACT

In this week’s edition you will find:

  • Where We Are
  • What Was Important About Last Week
  • What We Are Watching For This Week
  • A Word On Discipline

The following sections are on our home site:

Where We Are:

Taking a look at the broader market:

Perception is reality for most traders.

On the face of things, you could see the some 3% losses on the major indexes as proof positive of a weak market.

You could also see Thursday’s sharp turnaround off lows as a capitulation type move common in turning points.

But just as the death of the face of the insurgency in Iraq, Abu Musab al Zarqawi, doesn’t mean the war is over – we can’t take this week’s stock market action as decisive.

This is a weak market. And while Thursday’s turnaround could easily mark a significant low for the market, it’s lack of upside volume takes some of its credibility away.

This camp won’t become bullish until we see a follow-through-day (FTD) in the books.

FTD’s occur after four days from a low, and within no more than seven days. They are marked by heavy volume with at least a 1.7% price gain. This tells us institutional money is supporting the market. The four day wait omits misreading any heavy short covering as real buying.

FTD’s have been solid indicators for intermediate-term trading. Nothing is certain in the markets, but acting without a solid edge is like playing a slot machine.

We will simply let the market dictate our moves, and are not so foolish as to let the face of things sway us from reality.

Technically speaking:

The Dow Industrial Average
($INDU), -3.2%, put in a key reversal day Thursday after undercutting its 200-day moving average to close positive. The index is testing the lower end of its upward trending channel.

The S&P 500
($SPX), -2.8%, closed just below its 200-day moving average after putting in a key reversal day.

Nasdaq
($COMPQ), -3.8%, continues to show relative weakness against the other indexes as it trades below its major moving averages. The index tested below it’s upward trending channel.

Russell 2000
($RUT), -4.9%, closed on its 200-day moving average, as it tests the bottom of an upward trending channel.

Volume indications favored the bears as each index scored two distribution days, and the Russell one extra.

Hi / Lo Ratio was off recent lows, though continued to register in bearish territory.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 10-year Note Yield
($tnx) continued upon a now month-long decline, though is technically trend-up.

The U.S. Dollar Index
($USD) rebounded after consolidating in a month-long range. The index is tracking below its major moving averages.

The Gold Miners Index
($XAU) is attempting to reverse on its 200-day moving average.

The Dow Jones AIG Commodity Index
($DJAIG) is holding above its 200-day moving average.

Consumer Staples
($CMR) is trading under its 50-day averagae and above its 200-day average.

Consumer Cyclicals
($CYC) is also trading under its 50-day averagae and above its 200-day average.

Technology
($DJUSTC) continues to take the brunt of heavy selling as it trends well below its major moving averages.

The Semiconductor Index
($SOX) reflects a weak envorinemtn for technology stocks as it trades well below its major moving averages.

Banks
($BKX) are showing relative strength as the index trades above its major moving averages.

Broker Dealers
($XBD) reversed on its 200-day moving average, and has been consolidating for the last three weeks.

Retail
($RLX) is trading below its major moving averages.

Healthcare
($HCX) is consolidating below its major moving averages.

Biotech
($BTK) is trading below its major moving averages.

REIT’s
($DJR) is showing relative strength as it goes trend-up for the third week to close above its 50-day moving average.

Homebuilders
($DJUSHB) continued to slide well below its major moving averages.

Transportation
($TRAN) continues to pull back modestly as it tracks below its 50-day and above its 200-day averages.

Airlines
($XAL) consolidated below its major moving averages.

Defense
($DFX) is attempting to reverse on its 200-day moving average.

Energy
($IXE) is also attempting to reverse on its 200-day moving average. The sector is showing technically bearish signs with a rounding top and lower high recently in place. An upward trend line has been violated.

Utilities
($UTY) is poised to move higher as it forms the right side of a base.

The top 10 industry groups from the 6 month RS screen are:

  1. INTERNET SERVICE PROVI
  2. DRUG RELATED PRODUCTS
  3. MACHINE TOOLS ACCSORIE
  4. SPECIALTY RETAIL OTHER
  5. STEEL IRON
  6. AUTO DEALERSHIPS
  7. GAMING ACTIVITIES
  8. PUBLISHING – NEWSPAPER
  9. FOOD – MAJOR DIVERSIFI
  10. CATALOG MAIL ORDER HOU

What Was Important About Last Week

STOCKS:

  • Texas Instruments (TXN) issued upside guidance for Q2 (Jun), sees EPS of $0.40-0.43, excluding $0.05-0.06 in gains but including $0.04 in option expense; the Reuters Estimates consensus is $0.40. Co also sees Q2 revenues of $3.63-3.78 bln, up from previous guidance of $3.46-3.75 bln (consensus $3.62 bln).
  • Xilinx (XLNX) reaffirmed Q1 guidance of 1-5% sequential revenue growth, or roughly $477-496 mln (consensus $488 mln.
  • National Semiconductor (NSM) reported Q4 (May) earnings of $0.41 per share (Excluding a $0.07 charge), $0.03 better than the Reuters Estimates consensus. Total revenues rose 22.6% year/year to $572.6 mln vs. the $565 mln consensus.
  • Novellus Systems (NVLS) raised its Q2 EPS outlook to $0.37-$0.40, above the Reuters Estimates consensus of $0.28, and increased its previous revenue guidance of $375 mln to a range of $400-$410 mln.
  • Take-Two Interactive (TTWO) reported Q2 (Apr) loss of $0.47 per share, excluding non-recurring items, $0.36 worse than the Reuters Estimates consensus of ($0.11). Revenues rose 19.4% year/year to $265.1 mln vs. the $258.6 mln consensus.
  • BMC Software (BMC) reported Q4 (Mar) earnings of $0.35 per share (Excluding non-recurring items), $0.06 better than the Reuters Estimates consensus.
  • H&R Block (HRB) reported Q4 (Apr) earnings of $1.79 per share, excluding an after tax charge of two cents per share, $0.02 better than the Reuters Estimates consensus.
  • Bob Evans (BOBE) reported Q4 (Apr) earnings of $0.47 per share (Excluding non-recurring items), $0.10 better than the Reuters Estimates consensus.
  • Smithfield Foods (SFD) fiscal fourth-quarter profit dropped 99%, hurt by
    depressed pork margins and lower live-hog prices due to oversupply in the
    U.S.

ECONOMY:

  • The ISM non-manufacturing index pulled back in May to 60.1 versus 63.0 in April. The three month average of the ISM non-manufacturing index is 61.2, while the six month average is 60.3 and the 12-month average is 59.2. This indicates economic expansion in the services sector of the economy. Thirteen of the 17 industry groups surveyed reported growth in May compared to 14 in April. The new orders component fell to 59.6 last month from a five-year high of 64.6 in April.
  • The Bush administration raised its forecast for both U.S. economic
    growth and consumer-price inflation in 2006, and indicated both would be
    slower next year.
  • The European Central Bank raised its key interest rate by a quarter of
    a percentage point to 2.75% in a move aimed at keeping inflation at
    bay, and ECB President Jean-Claude Trichet suggested further increases
    could be needed.

What We’re Looking For This Week

Key earnings releases:

  • MONDAY: Lehman Brothers Holdings Inc. (LEH).
  • TUESDAY: Best Buy Co., Inc. (BBY).
  • WEDNESDAY: none
  • THURSDAY: Bear Stearns (BSC), KB Home (KBH), Pier 1 Imports, Inc. (PIR).
  • FRIDAY: Winnebago (WGO).

On the economic front we have potential market movers with:

  • MONDAY: Treasury Budget,
  • TUESDAY: Business Inventories, Core PPI, PPI, Retail Sales, Retail Sales ex-auto
  • WEDNESDAY: Core CPI, CPI, Crude Inventories, Fed’s Beige Book
  • THURSDAY: Initial Claims, NY Empire State Index, Net Foreign Purchases, Capacity Utilization, Industrial Production, Philadelphia Fed
  • FRIDAY: Current Account, Mich Sentiment-Prel.

The Following Sections Are On Our Home Site:

This Week’s Word On Discipline:

“Discipline must come through liberty. We do not consider an individual disciplined only when he has been rendered as artificially silent as a mute and as immovable as a paralytic. He is an individual annihilated, not disciplined. ” – Maria Montessori

Hurricane Season

Traders,

Things come too easy, I get suspicious
things come too slow, I get bored
if it don’t work out I get superstitious
but if it does, oh my word
David Gray “New Horizons”

Our current position:

SELLERS’ EDGE INTACT

In this week’s edition you will find:

  • Where We Are
  • What Was Important About Last Week
  • What We Are Watching For This Week
  • A Word On Discipline

The following sections are on our home site:

Where We Are:

Taking a look at the broader market:

Warm summer winds often go hand-in-hand with markets that sway gently on lighter volume.

But it’s also hurricane season, and unsuspecting bulls may be in for a wild one if danger on the horizon comes through.

As discussed last week, the market has corrected in similar fashion every six months for the last few years.

During every corrective phase, our analysis looks for evidence to indicate bullish stability has returned. This is primarily done by watching for follow-through days (FTD’s).

FTD’s occur after four days from a low, and within no more than seven days. They are marked by heavy volume with at least a 1.7% price gain. This tells us institutional money is supporting the market. The four day wait omits misreading any heavy short covering as real buying.

We have one FTD in the books for the Nasdaq 100, which occurred Thursday.

The single FTD serves as a ray of hope, but we’re not bullish until we see the other indexes follow through.

Given later-stage bull markets tend to support the durable blue chips that comprise the Dow and S&P 500, it would be comforting to see them put in FTD’s.

While we generally look for Technology indexes like the Nasdaq 100 to lead the market, but in reality it’s weighing things down.

The Nasdaq 100 and the Dow Jones Technology Index are relative strength losers, trading well below their major moving averages.

Aside from our equities analysis, we are seeing disturbing developments on the bond market front.

The bond market often sets up patterns in the stock market.

A multi-year trend-line for the 10-year Yield continues to hold a picture of stability, but should the yield break decisively above it – we’re looking at a tectonic shift.

Moves out of major trend-lines illustrate heavy shifting. Money leaving a sector will enter another, and more importantly, psychology shifts.

As the bond market digests economic news, recent discussion from the Federal Reserve appears to have raised more questions than it has answered.

It should go without saying that the Fed’s hold on market sentiment is profound.

For the last two years, the Fed has steadily raised interest rates 25 basis points every six weeks.

While a strong economy is good for stocks, and continues to give the Fed reason to raise rates – at some point all trends come to an end.

Where exactly the end point is never becomes clear until well after the fact.

Two ways Fed watchers try to predict the direction of rate hikes are by measuring the guided statements of the FOMC, and by determining probabilities reflected in Fed funds futures market trading.

Recent FOMC minutes show a significant division among Fed members over where the economy is heading.

Questions over whether or not inflation merits another rate hike, or if past hikes have already slowed the economy enough to stop raising are met with different analysis. Fed members are not on the same page, nor are market mavens.

The ambiguity is also reflected in the Fed funds trading.

After weaker than expected unemployment data Friday, Fed funds futures trading signified the probability of a rate hike at 48%. This is down from about 70% prior to the news.

Markets hate uncertainty. If the market continues to experience a collective uneasiness, the path of least resistance will be down.

We’re eying Technology indexes as a potential leader for the broader market to stabilize. And we’re watching the bond market as a bellwether for something potentially ugly to happen.

Because we’re traders, and we only make moves when conditions are favorable, we feel the best action right now is to do nothing – or if your risk tolerance can handle it, align yourself with a balance of short and long candidates.

Technically speaking:

The Dow Industrial Average
($INDU), -0.3%, traded just above before closing just below its 50-day moving average.

The S&P 500
($SPX), +0.6%, continued to rally off its 200-day moving average, though remains shy of its 50-day average.

Nasdaq
($COMPQ), +0.4%, traded just above its 200-day moving average before closing just below it.

Russell 2000
($RUT), 1.1%, continued to rally from its 200-day moving average, though is shy of its 50-day average.

Volume indications gave us a follow-through day (FTD’s) on the Naz100.

Hi/Lo Ratio is showing good breadth in new highs.

Key chart action for the week:

The 10-year Note Yield
($tnx) slipped to close just below its 50-day average.

The U.S. Dollar Index
($USD) traded shy of a new low for the year.

The Gold Miners Index
($XAU) continues to consolidate below its 50-day average and above its 200-day average.

The Dow Jones AIG Commodity Index
($DJAIG) continues to consolidate above its major moving averages.

Consumer Staples
($CMR) closed just above its 50-day moving average, and is half from a recent low and the year’s high.

Consumer Cyclicals
($CYC) closed just above its 50-day moving average.

Technology
($DJUSTC) consolidated below its major moving averages.

The Semiconductor Index
($SOX) rallied for the first time in three weeks, though continues to trade below its major moving averages.

Banks
($BKX) rallied north of its 50-day moving average after consolidating for a week.

Broker Dealers
($XBD) was little changed for the week as it trades below its 50-day average and above its 200-day average.

Retail
($RLX) rallied from below its 200-day average as it remains below its 50-day average.

Healthcare
($HCX) put in a second week of rallying from a double bottom, though remains below its major moving averages.

Biotech
($BTK) closed just below its 50-day and 200-day averages as the two lines now touch.

REIT’s
($DJR) closed on its 50-day average which continues to trend above its 200-day average.

Homebuilders
($DJUSHB) continued to slide below the major moving averages.

Transportation
($TRAN) closed above its 50-day average after consolidating below it last week.

Airlines
($XAL) consolidated below its 200-day moving average.

Defense
($DFX) continues to trade below its 50-day average and above its 200-day average.

Energy
($IXE) closed on its 50-day average, which continues to trend above its 200-day average.

Utilities
($UTY) moved further above its averages as it has now formed a bullish looking base.

The top 10 industry groups from the 6 month RS screen are:

  1. GOLD
  2. STEEL IRON
  3. INTERNET SERVICE PROVI
  4. GENERAL CONTRACTORS
  5. MACHINE TOOLS ACCSORIE
  6. CATALOG MAIL ORDER HOU
  7. SPECIALTY RETAIL OTHER
  8. DRUG RELATED PRODUCTS
  9. PRINTED CIRCUIT BOARDS
  10. INDUSTRIAL METALS MINE

What Was Important About Last Week

STOCKS:

  • Starbucks (SBUX) said that May same-store sales rose 7%, the consensus was +7.7%.
  • American Eagle Outfitters(AEOS) said May comp sales rose 11% vs. +9.6% Street estimate.
  • The Dress Barn(DBRN) beat expectations by three cents, co reported Q3 (Apr) earnings of $0.29 per share, $0.03 better than the Reuters Estimates consensus. Total revenues rose 10.5% year/year to $327.2 mln.
  • Monsanto (MON) issued Q3 and FY06 EP guidance. Co sees Q3 EPS of $1.15-1.20 (consensus $1.19) and sees FY06 EPS of $2.50-2.55 (consensus $2.61).
  • Microchip Technology (MCHP) stated that it is reaffirming its guidance for net sales and EPS for Q1 of fiscal 2007 ending June 30, 2006. Net sales are expected to be up about 5-6% and non-GAAP EPS are expected to be about $0.37.

ECONOMY:

  • Non-farm payrolls increased by 75,000 jobs in May, less than the consensus expectations of 170,000. Payrolls were revised down by a total of 37,000 in March and April. Payrolls have added 1.9 million jobs in the past year.
  • The household survey reported that employment increased by 288,000 last month, while the labor force increased by 180,000. As a result, the unemployment rate fell to a 58-month low of 4.6%.
  • Average hourly earnings increased just 0.1% in May but were upwardly revised to show a 0.6% increase in April. Average hourly earnings have gained 3.7% in the past year.
  • The ISM Manufacturing index pulled back to 54.4 in May versus 57.3 in April. This was below consensus estimates of a 55.6 level.
  • The Chicago Purchasing Managers’ Index (PMI) rose to 61.5 in May, higher than consensus estimates of 56.4. The index has been above 50 for 37 consecutive months.

What We’re Looking For This Week

Key earnings releases:

  • MONDAY: Bob Evans Farms (BOBE), CMGI (CMGI).
  • TUESDAY: Korn Ferry International (KFY).
  • WEDNESDAY: H&R Block, Inc. (HRB).
  • THURSDAY: Shuffle Master, Inc. (SHFL).
  • FRIDAY: none

On the economic front we have potential market movers with:

  • MONDAY: ISM Services
  • TUESDAY: none
  • WEDNESDAY: Consumer Credit
  • THURSDAY: Initial Claims, Wholesale Inventories
  • FRIDAY: Export Prices ex-ag., Import Prices ex-oil, Trade Balance

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This Week’s Word On Discipline:

“The secret of success is constancy of purpose.”– Benjamin Disraeli