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Where's The Bull?
by Mark M. Rostenko
Editor, The Sovereign Strategist
June 29, 2004

Stocks were a mixed bag last week as the S&P 500 closed barely changed once again, the Dow slipped a bit and the Nasdaq finished out on a strong note. The Dollar Index fell while gold busted out to over $400 again. Crude oil has become decidedly less interesting in the absence of new record highs, leaving yours truly with far less to get hysterical about.

Despite all the bullish propaganda the market continues to struggle with gains. Sure, we saw a decent rally off the May lows but we’re about to complete our fourth consecutive month of no new gains. The March mini-bull market high in the S&P 500 remains unchallenged and last week’s action didn’t do much to inspire faith that it will be breached.

The S&P 500’s new 2-month high failed to take out the April high, the first major line of resistance ahead of the 1163 rally high posted in March. That leaves us with the 4-month pattern of progressively lower lows and lower highs firmly intact.

Of course, it wouldn’t take much to change all that. The short-term uptrend also remains intact and there’s no terribly compelling reason to believe that it has run its course. However, last week’s action was hardly encouraging. The S&P probed into new multi-month high territory but the new highs were soon rejected with last Thursday’s reversal session which saw substantial, high volume follow-through last Friday.

Swift rejections of bullish developments do not bode well for markets, particularly markets that are supposed to be bulls. New highs should usher in new enthusiastic buying, not aggressive selling. With the mini-bull high within relatively easy striking distance, a bull might expect a test to be “in the bag.”

It could still happen, of course, but if it doesn’t, we’ll be witnessing quite a bearish unfolding. First off, we have March’s swift rejection of the mini-bull market high. The S&P 500 probed briefly into new multi-year high territory but failed to follow through. That move was followed by a crushing 4-day decline and still further losses in subsequent weeks. April’s attempt to erase those losses didn’t quite succeed and the market skidded lower again, this time to a 5-month low.

And now the market is at it again but if last week’s bearish action follows through, we’ll have a major topping formation still intact with a well-defined progression of lower lows and lower highs. That means buyers keep running out of steam and sellers get aggressive at lower and lower prices. Rallies petering out at lower and lower levels is not indicative of underlying bullishness.

A decisive breach of the May low near 1076 would complete a major top and, coupled with the failure to post new highs, would almost assuredly embolden sellers to act aggressively. Our first major clue that such an event is likely would be a breach of the minor low at 1122. From there, a test of 1076 becomes quite likely as it would indicate a technically decisive end to the rally.

I caution the reader that this analysis is laden with assumptions, foremost among them being that last week’s high marked the end of the short-term rally. That could easily change very quickly, particularly with all the goings-on this coming week.

Friday brings the June unemployment data. In a few days, the handover of Iraq. Both anxiously anticipated by the markets. But the biggest story is the Fed meeting. A rate hike is virtually guaranteed. Well, there’s always the possibility that Uncle Al, ever the jolly prankster, won’t hike rates just to give the stock market a nice little surprise. I’m no expert Fed watcher, nor have I ever played one on television, but in my estimation that’s highly unlikely.

The markets are anticipating a 25 bp hike and last week’s news of a downward Q1 GDP revision makes that especially likely (as opposed to a 50 bp hike). Of course, there’s that pesky upward revision to the inflation numbers, but that’s not likely to worry the Fed.  Let us not forget that it’s pretty much the Fed’s job to debase and inflate our money, (while proclaiming just the opposite), so news that their efforts are succeeding shouldn’t trouble them too much.

Indeed, The Big G recently told senators that “inflationary pressures are not likely to be a serious concern in the period ahead.” Naturally, for someone carted around in a limo and catered 47-course lunches at the taxpayers’ expense, inflation isn’t a concern in the period ahead, the period behind nor the period present. But for those of us who pay our own bills and work for a living, inflation takes on far greater significance.

I know it’s a rising concern because even the bubble-brained media is beginning to catch on. The Arizona Republic reported this brilliant newsflash last week: “Experts' assurances fail to ease inflation pain for consumers.”

Can you believe it? Greenspan prattling on about the lack of serious inflation concerns hasn’t served to make consumers feel better about paying $2 a gallon for gas and $4 a gallon for milk! Whoulda thunk it? Expert analysis proclaiming “inflation is low by historical standards” doesn’t seem to change the fact that families are seeing hundreds more dollars flowing out each month for the same amount of stuff.

But I digress. The real story this week will not be the rate hike but what Uncle Al has to say about it. Everybody’s looking for clues about the pace of future rate hikes. Fast or slow, big or little? 

I don’t know what he’ll say and I don’t know how the markets will react. But I do know this: we can’t afford sharply higher rates and the Fed will do everything in its power to hold them down. The name of the game these days is “jawboning.” Uncle Al will tell the markets whatever it is they want to hear but rest assured that the plan is to keep rates as low as possible for as long as possible. And you, the consumer, can pay for it with the “inflation tax.” Whatever it takes to keep the asset markets looking good...

(This report will not be published next week, in observance of the 4th of July holiday.)

© 2004 Mark M. Rostenko
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