Confusing Times!
You talk about a confusing and complex environment and you can throw the economy, stocks, and bonds all into this category. What can you really say? Here at ProfessionalStockTraderLive.com we say WOW! Amazing time we live in. Nothing makes sense anymore, so we continue to say, trade the technicals of the stock market and let them be your guide.
The Economy
Mixed economic news at best continued again this past week, Friday July 30, 2010 we saw a poor headline number for the QTR 2 Advance GDP at 2.4% vs. expectations of 2.5%, a slight miss. However, we also saw QTR 1 GDP was revised up 0.7% to 3.4% from 2.7%, a modest revision higher. Some will even argue that the QTR 2 GDP Advance number was actually even better since we had the BEA re-estimate all of their data from 2007 through QTR 1 2010 for its annual benchmark revisions.
In the current GDP report we saw non-residential investments increase substantially along with a continued increase in cap exp spending. Maybe this why the DJIA erased a 120 point deficit to close down only 1.22 on Friday.
Key economic data comes out in both China and the US this upcoming week. China reports their PMI Sunday night, (August 1) while key US economic data is highlighted by the ISM on Monday (August 2) and the Non-Farm Payrolls on Friday (August 6). This data should make for an interesting week in stocks.
Stocks Poised For Meaningful Move?
While the economy continued to give mixed to negative signals during the month of July, stocks had an absolutely blockbuster month. The averages finished the month sharply higher led by the DJIA up 7.8%, S&P 500 up 6.90% and the NASDAQ higher by 6.88%.
As stocks approached the 1120 area of resistance basis the SPX Cash this past week, we discussed with our members to look for some corrective action to come into the market since the McClellan Oscillator was at extreme over bought levels, + 302, the highest in 12 months. Our downside objective was down towards the 1082-1089 area on the SPX Cash, the 50 day SMA and a 50% Fibonacci retracement level from the July 20, 2010 low to the July 27, 2010 high, respectively. We accomplished the fib retracement this past Friday, (July 30, 2010) as we got down to 1088.01, held and rallied sharply, closing at 1100.25.
The question now becomes, what are the technicals suggesting on the short term? Here at ProfessionalStockTraderLive.com we find this upcoming week to be very intriguing due to key economic data and the lack of price change in the McClellan Oscillator on Friday.
Friday, we saw the McClellan Oscillator close at 130.30, while on Thursday, it closed at 130.00. Anytime you get a close within a +- 2-3 point change, you can expect a move of 2-3% in the stock market in following 2-3 days. Typically, the move occurs in the proceeding direction. This is where it gets very intriguing and interesting. The direction in theory, has been down since we put in a short-term top on July 27, however; Friday, we rallied from down 120 points on the DJIA to close slightly lower with a positive advance/decline ratio. This past Thursday, we rallied from down over 100 Dow points to close lower by only 30 points and again saw a positive advance/decline ratio. So what’s the real trend?
The big question is, will we break out of this trading range we have been in or not? I have a sneaky suspicion the answer is yes, and it appears the direction very well could be up.
Stop and think, we have witnessed two consecutive days in a row where stocks were down early on poor economic data, only to see stocks close well off their lows, with positive advance/decline ratios. It certainly appears someone keeps catching the market. Also, we should note as of late, copper has been leading stocks higher and closed this past Friday at a near 3 month closing high of 3.3115.
This is certainly not a prediction of stocks breaking out to the upside but I have a sneaky suspicion we might see underinvested and underperforming fund managers give us a breakout above SPX Cash 1121. Regardless of whether the breakout is false in nature, as I do suspect it will be in the fullness of time, tape action suggests a breakout very well could be forthcoming.
Bonds Suggest What?
Bonds are another interesting scenario playing out in front our eyes. While stocks rallied all the way back to close nearly unchanged this past Friday, July 30, 2010, we saw the 30-year bond move steadily higher in the face of an afternoon rally, closing at the highs of the day, rallying an incredible 1’ 24, less then 1 point from their most recent highs on July 21, 2010. What are bonds signaling to us? Trouble! How does this tape action make any sense? It clearly doesn’t!
Also, we saw the 10 year yield close this past Friday at 2.907%, pressing the most recent lows of 2.883% on July 1, 2010. The 10-year note continues to suggest potential deflation and troubles looming. Even the St. Louis Fed President, James Bullard is thinking deflation is a real possibility on the heels of some recent language made by the FOMC.
As I brought to you in my last article, “What's The 10-Year Note Signaling?” I feel with today’s move higher in the bond market, it warrants another look at this interesting set of facts. The DJIA closed 2009 at 10,428 with the 10 year-note yield at 3.84%. Now, we have the DJIA closing today, July 30, 2010 at 10,466 with the 10 year-note yield at 2.907%, lowest yield being 2.88% on July 1, 2010 when the DJIA was at 9,620. How can the DJIA be 37 points higher then the 2009 close and have yields substantially lower? What continues to look wrong with this picture?
I am still of the belief regardless of where the stock market goes in the near term, the whole bond spectrum is not only signaling potential deflation but a pending economic slowdown.
Even the 30 year bond yield has dropped from 4.64% at the end of 2009 to 3.977% as of this past Friday’s close.
Final Thoughts
Look for continued mixed economic data, earnings and continued strange action in the bond market leaving everyone in a conundrum.
As for stocks in the near term, based on the McClellan Oscillator as mentioned above, expect a 2-3% move. Buckle up and be prepared for a crazy ride with plenty of volatility!
Since late November 2009, we have been teaching our members in our nightly video updates and daily live webcast to be vigilant in this continued complex market environment. We teach our members how to protect their portfolios and actually capitalize and make money in a declining market. Regardless of how you play the market, at ProfessionalStockTraderLive.com, we always preach our members to be patient, disciplined and use stops.
