At the Tipping Point (Again)

July 25, 2010

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At the Tipping Point (Again) (SPY, DIA, IWM, QQQQ)

Weekly Stock Market and ETF, Exchange Traded Fund Commentary from Wall Street Sector Selector

Courtesy of John Nyaradi

Volatility was the name of the game last week as the bulls struggled back and nearly managed to push the S&P 500 above the all important 200 Day Moving Average. As I mentioned during the mid-week updates this struggle will resolve itself one way or other in the coming days as the markets battle between negative macro indicators and positive earnings news.

If the 200 Day Moving Average can be breached and held on the positive side, one could see another strong up leg ahead. If this attempt fails, then lower prices or the current trading range will very likely continue.

Today we switch to “Yellow Flag Flying,” expecting choppy prices ahead.

Looking at My Screens

The indicators remain mixed with the Dow and Russell 2000 and NASDAQ 100 now above their respective 200 Day Moving Averages and the S&P 500, our major market barometer, below its 200 day average but having successfully breached the psychologically important 1100 level and a solid close above its 50 Day Moving Average.

We remain overbought on a short and medium term basis which is bearish while sentiment remains relatively neutral with not much conviction on either side of the trade.

The View from 35,000 Feet

Macro economic news was poor this week with new unemployment claims unexpectedly rising from 464,000 to 472,000 and the ECRI (Economic Cycle Research Institute) annualized indicator dropping to -10.5 from -9.8 and breaching the all important -10 level which has been an accurate forecaster of recession for more than 40 years. This week’s reading was its lowest since last May as the current recovery was getting under way.

The big news items were Dr. Bernanke’s testimony to Congress in which he said the recovery was ongoing but that we are in uncertain times and that the Fed stood ready to assist the recovery with more “quantitative easing” if conditions required. Stocks plunged hard on his first day of testimony and rallied hard on the second, reflecting the confusing nature of today’s markets.

Good earnings from Caterpillar and UPS helped the market higher and on Friday the results of the European banks “stress tests” were made public with just 7 out of 91 “failing” the tests.

Over the weekend I’ve been reading almost unanimous opinion that the stress tests weren’t stressful and this was reflected in the Euro dropping after their announcement. The major complaint was that the tests ignored most of the banks’ sovereign debt holdings which would be similar to ranking your credit score without including your home mortgage, and so there’s speculation in both the mainstream financial press and “blogosphere” that markets won’t “buy” the outcome of the tests on Monday when they reopen. We’ll have to wait and see how that goes.

But Europe clearly has ongoing problems as Moody’s placed Hungary on review for a possible downgrade and the European LIBOR is at recent highs, indicating stress in the credit markets.

Furthermore, as we discussed last week, bond prices remain priced for Armageddon as the 2 Year Treasury yield remains at lows as the bond market ignores the current rally in equities.

What It All Means

The tug of war continues and we will be ready to respond in either direction. A very compelling argument can be made for a rally or a selloff based on both fundamental and technical indicators. If the 200 day moving average is broken to the upside, there likely will be a massive short covering rally and if the index fails to break higher, then the major indexes are superbly positioned for a significant slump on the order of 8-10% or approximately S&P 900-950.

The tone will be set when trading begins in Asia and Europe and we get the first hint of the response to the European banks’ stress test. With the Euro falling on Friday and the 3 month Eurobor at highs for the year, the early response to the results was negative and if this if followed through in the equity markets, lower prices would likely be ahead.

Highest probability for the coming days would be a decline within the trading range we have been in as macro indicators could likely continue their negative streak, earnings remain positive, market participants remain suspicious of the true health of the European banks and technical indicators trump for the short term ahead.

The Week Ahead

It will be another exciting week with major economic reports and ongoing earnings reports, although with fewer bell weather companies reporting than last week.

Economic Reports:

Monday: June New Home Sales

Tuesday: May Case/Shiller Home Price Index, July Consumer Confidence

Wednesday: June Durable Goods, July Fed Beige Books

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims

Friday: Q2 GDP Revision, July Chicago Purchasing Managers Index, July Final University of Michigan Consumer Sentiment.

Earnings:

Tuesday: BP, DuPont, US Steel

Wednesday: Boeing, General Dynamics

Thursday: Exxon

Sector Spotlight:

Leaders: Copper, Brazil, Homebuilders