Heart of the Summer

Traders,

Stoppin’ on the red
You’re goin’ on the green
‘Cause tonight’ll be like nothin
‘You’ve ever seen
And you’re barrelin’ down the boulevard
Lookin’ for the heart of Saturday night
Tom Waits “Heart of Saturday Night”

Our current position:

VERY CAUTIOUS UPSIDE BIAS

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 can now be found on our home site:

Where We Are:

Taking a look at the overall markets:

Traders are finding no shortage of stimulation this summer as the search for the heart of this market goes on.

Lows made on the major indexes in early June will prove pivotal as the dominating market themes, which have been historically bearish for stocks, continue to light up the headlines.

Pulsating to the tune of a slowdown, economic growth has clearly weakened. June auto sales were weak. May construction spending is down. The June ISM manufacturing index fell to 53.8 from 54.4 in May. And retail chain store data and ISM services index are both soft.

Stocks, our favorite leading indicator of the economy, are confirming that things are not so good.

Poorly bid Technology issues continue to weigh down the major indexes, when we’d prefer to see them serve as fuel.

In particular, Semiconductors ($SOX) have been in a sharp decline since March. Semiconductors are important for their ubiquitous presence throughout various industries, and weakness in the sector simply tells us the lack of interest represents a soft environment for growth.

However, we are seeing support for Consumer Staples ($CMR), as they have been consolidating nicely on the weekly chart.

Also, Drugs ($DRG) are showing resilience with a narrow trading range established for the year. The latest manufacturing report highlighted that shipments of pharmaceutical products continued to increase. BCA Research says a decisive reversal of the past two years is a significant vote of confidence for the sector.

Energy stocks are relative strength winners for the summer, and counter intuitively, Transportation ($TRAN), which tends to sag on high Energy prices, has formed a bullish cup-and-handle formation.

We’re anticipating some kind of resolve here where either Energy or Transportation gives in and sells off. Should Transportation pick up pace to the upside, we’ll interpret it as a bullish sigh for stocks.

The Yellow Flag is out because we do have confirmed indication of institutional support for the market in a Follow Through Day. But if Friday’s heavy selling becomes the norm in the coming sessions, we’re going Bearish again.

Technically speaking:

The Dow Industrial Average ($INDU), -0.5%, flirted with its 50-day moving average all week before dipping decisively below it on high volume Friday.

The S&P 500 ($SPX), -0.4%, also flirted with its 50-day moving average all week before dipping decisively below it on high volume Friday.

Nasdaq ($COMPQ), -1.9%, traveled further below its major moving averages, which are now serving as resistance.

Russell 2000 ($RUT), -2.1%, closed below its 50-day average and above its 200-day average.

Volume indications are providing a modest upside bias after a Follow Through Day June 21 followed by a massive upside pressure day June 29 weigh in heavier than the two bearish distribution days made within the past two weeks.

New Highs – New Lows is flirting with positive readings as it keeps pace with the major averages.

Key chart action for the week:

Charts courtesy of Stockcharts.com

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

  1. STEEL IRON
  2. AIR DELIVERY FREIGHT S
  3. DRUG RELATED PRODUCTS
  4. LODGING
  5. TRUCKING
  6. MOVIE PRODUCTION THEAT
  7. MACHINE TOOLS ACCSORIE
  8. BEVERAGES-SOFT DRINKS
  9. SPECIALTY RETAIL OTHER
  10. GAMING ACTIVITIES

What Was Important About Last Week

STOCKS:

  • Hot Topic (HOTT) said same-store sales fell 3.4% in June, which was less than a 4.1% decline estimated by Thomson Financial. Co same-store sales for the quarter so far are down 4.6% but total sales for the quarter are up 7% to $107.2 mln.
  • The Men’s Wearhouse(MW) said its U.S. same-store sales were up 3.7% in June, which was better than the 3.2% estimated by Thomson Financial. Co also said total sales in the current quarter to date are at $346.9 mln.
  • Zumiez (ZUMZ) said June same store sales rose 12.4% versus a 10.7% increase the previous year and better than the Briefing.com consensus of 9.3%.

ECONOMY:

  • Non-farm payrolls increased by 121,000 jobs in June, less than consensus expectations of 175,000. Net payrolls revisions added just 3,000 jobs in the previous two months.
  • The household survey reported much stronger job growth, increasing by 387,000 last month. The labor force gained 330,000. As a result, the unemployment rate fell below 4.6% (4.598%), a low for this cycle.
  • The ISM non-manufacturing business barometer pulled back to 57.0 in June versus 60.1 in May. Nonetheless, this signals continued robust expansion in the services sector of the economy. While fourteen of the 16 industry groups surveyed reported growth in June, the new orders component retreated to 56.6 last month, the second consecutive monthly decline after reaching a five-year high of 64.6 in April.
  • The ISM Manufacturing index pulled back to 53.8 in June, its lowest level since May 2005. The June reading was below consensus estimates of a 55.0.

Key earnings releases:

  • MONDAY: ALCOA Inc (AA), Schnitzer Steel Industries, Inc. (SCHN).
  • TUESDAY: California Pizza Kitchen (CHPK), Genentech, Inc. (DNA), Ruby Tuesday (RI).
  • WEDNESDAY: Smart & Final Inc. (SMF).
  • THURSDAY: Marriott International (MAR), PepsiCo (PEP), Tribune (TRB).
  • FRIDAY: General Electric (GE).

On the economic front we have potential market movers with:

  • MONDAY: Wholesale Inventories, Consumer Credit,
  • TUESDAY: none
  • WEDNESDAY: Trade Balance, Crude Inventories
  • THURSDAY: Initial Claims, Treasury Budget
  • FRIDAY: Business Inventories, Export Prices ex-ag, Import Prices ex-oil, Retail Sales, Mich Sentiment-Prel., Business Inventories

The Following Sections Are Now On Our Home Site:

This Week’s Word On Discipline:

“That government is best which governs the least, because its people discipline themselves. ” —Thomas Jefferson.

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