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

The Following Sections Are On Our Home Site:

This Week’s Word On Discipline:

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

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