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Assuming that another hurricane doesn’t strike, it seems as if there is no more “good news” to propel the market higher. While stock market sentiment appears to be quite positive, I’ll submit that this optimism is without basis. Long term momentum is gone, and as I will show tonight, the consumer stock leadership is being punished while the market has thus far failed to break out to new highs. Best Buy Speculators Get Punished Early this week, many speculators tried to make a quick buck by buying electronic consumer products from retailer Best Buy (BBY) before their quarterly earnings report. Yet this time around, instead of a quick and easy profit, when Best Buy’s earnings and outlook disappointed, those traders got whipped. Note the pre-earnings rally followed by the punishing action after the earnings disappointment.
Best Buy now sits at a key technical level which may provide insight about the near term market direction. If the 44.75 level holds as it has done twice before, the market may stay bullish. If key technical support breaks in the near term, this will be bearish for the market. A look at the chart of the formerly loved stock, PF Chang’s China Bistro, shows a key support level being broken in August. The stock then rallied back and tried to whip saw back above support. For a moment it appeared as if the trend of whipsaws would continue once again; yet this attempt failed and now the trend for PFCB is clearly down.
The 3-year weekly chart of the Dow Jones Restaurant and Bars index ($DJUSRU) suggests that the US consumer is running out of spending money and credit. In late August, the index has crashed decisively below its 40-week moving average for the first time, only to be rescued by the post-Katrina rally. This week, the index turned back below its long and intermediate term moving averages. It appears that the Katrina rally was for suckers.
In a similar manner as the restaurant index, the exchange-traded Retail Holders fund is showing stock market laggardship over the last few months.
As you can see from the 3-year weekly chart above, the index now sits at a lower level than it did before the 2004 presidential election. While I’m hesitant to come to a conclusion that is based on momentum, you will note that new highs in the RTH were made with a momentum divergence. On a weekly basis, the RSI appears to be ready to turn below the 50-line. J.C. Penney has been a strong leader of the US consumer rally, yet over the last couple of weeks, the stock has suffered severe technical damage. Below is the one year daily chart illustrating the decisively broken UP trendline. The stock of Wal-Mart cracked below support at about 50 several months ago, while up scale retailers have continued to advance. As the US consumer becomes exhausted, the corresponding stocks should exhaust themselves from the bottom up. J.C. Penney sits above Wal-Mart and below Nordstrom in the income food chain. I’d be hesitant to take a bearish position against Wal-Mart though, since every J.C. Penney customer is a potential Wal-Mart customer.
A pull back to the 3-year chart shows that this visible and competitive business may have a bit more of “down” left in it. Less than 3 years ago, the $50 stock traded in single digits.
A look up the food chain at a long-term chart of Nordstrom indicates that the stock may have completed a 5-wave UP pattern. With the US consumer possibly exhausted, is there more “Up” to follow?
Shorter term, the stock is at a key technical level. With the recent wild action indicative of speculators and not investors, failure to break into new high ground, coupled with a broader market swoon, is likely to trigger a sell off in Nordstrom stock, which is illustrated in the six-month daily chart, below.
Put up or Shut up time for the Bears Below is a weekly chart of the S&P 500 from 1990 to the present. If the 3-year bull market is a correction of the first phase of the bear market, it would be logical that this “correction” of the S&P 500 would be turned away at about the 61.2% Fibonacci retracement level at 1250. If the S&P 500 breaks decisively above the 1250 level, that would cast doubt on the bear market “correction” theory. By the same reasoning, a decisive failure near the 1250 level would lend credence to the long-term bear market theory. The point is that the S&P 500 is at a key technical level which requires attention and serious consideration. It is also notable that as the S&P 500 has made its recent new highs with a corresponding loss of momentum as indicated by the blue trendline shown on the RSI chart below.
The Cisco Indicator The character of the market may be defined as how it feels about Cisco (CSCO). The stock has been in a fairly narrow trading range of between 20.5 and 17 since July of 2004. It is my belief that the next big move in the stock market will be signaled by which side of this range Cisco breaks. Every time Cisco threatens the 17 level, it gets an analyst upgrade or positive article in a major publication such as Barron’s. It’s almost as if the very visible Cisco is being held up by organized support. Cisco is now in the 17’s again, below both its 50 and 200-day moving averages, and if it decisively breaks below 17, that may suggest that for the stock market, the sky is falling.
Today’s Market The stock market was little changed today, yet volume on the NYSE was well above average, trading over 2 billion shares. This could be signaling a change in character too. Relatively high volume with no progress to the upside is not a bullish sign. Consumer stocks were similarly little changed for the most part. Best Buy lost a little ground below its former support line, yet has not decisively broken its support at about 45.
Similarly the downtrend in PF Changs China Bistro continued. The bond market has reversed its course again and now interest rates are headed up. This seems appropriate given the amount of demand for loans the repair from Katrina will bring. Consumer stocks failed to rally in the face of a bond market rally (interest rates down) right after Katrina, and now a bond market swoon would spell more trouble for consumer stocks, which are well above their average valuations.
Gold is on a tear and sits at or above its late 2004 high. Could this be the second big wave up (Wave 3)? Remember, the second wave up tends to be the wave where the crowd is right, so don’t be put off by bullish sentiment among the crowd because it’s a Bull Market and it is Wave 3. I’d like to see gold clear the old highs decisively. While silver has acted comparatively poorly, silver stocks have held their own in the face of sub $7.00 spot prices. It may be significant that the dollar was up significantly at the same time that gold was up too. Can you say world wide currency debasement? The bull market in oil is intact, as oil has stayed true to its trendlines. You will note that oil could correct down to the mid 50’s and still be true to its trendlines.
The S&P 500 may have been turned down at the 62% retracement level as described above.
In spite of this, it would be premature to suggest that the bull market is over until more serious technical damage is suffered by the major indices. Similarly, a comfortable break into new high ground would need to be respected. The president speaks tonight on TV, and I doubt that he will suggest that the sky is falling. His last speech marked a short term stock market bottom, and ushered a sharp and tradable rally. That is to be respected too whether the sky is falling or not. The short term fall out of the speech could be a short term rally in the bond market and a drop the price of gold. Have a great evening. Martin Goldberg
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