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- Market cannot make use of good news yet again, starts yet lower.
- Consumer prices rise more slowly, capping a week indicating the economy is already starting back up.
- SP500 cracks through 200 day MA, NASDAQ dives lower.
- Techs in full retreat, following SOX lower, pulling large cap indexes with it.
Market squanders last rally attempt of the week as stocks turn and dive lower.

It was a week where the market was poised to rebound, but as it has the past three weeks, it frittered away each attempt. Sessions would start stronger with new promise on some decent earnings reports, but then it would fade to the close as buyers shot their ammunition early and had no reserves to take their place. Classic bearish intraday action underscoring the market weakness as one bounce attempt after another failed.

The weakness was most evident in technology and semiconductors, though by the close even the smaller caps that had held their gains most of the session reversed and posted losses between techs and large caps. Dell upped its Q3 guidance, but that was not enough to hold early gains. Retail, a strong performer even with WMT in the tank, has started to erode and was down harder Friday on fears the consumer would run out of steam just as it appears the economy is starting to emerge from its short slow spot. IBM was a stark example of technologys struggle, having posted a solid earnings report that gapped the stock higher only to relinquish nearly all of the gain on a strong volume surge.

That was typical action for most stocks Friday although there were still pockets of strength, e.g., small financials (savings and loans, regional banks), defense and energy. The small financials are something of a surprise. As we have noted before, however, energy does not provide the kind of leadership that pulls the market higher. Energy tends to feed off of things that make the market weaker, in this case higher energy costs. When you leadership group thrives due to conditions that sap the rest of the market, that is not great. If the market had more leaders like that it would have fewer leaders like that.

It was another day with the same old pattern for the week (up early, down late), but it had a twist. SP500 broke below its 200 day SMA and NASDAQ blew out the next support level. The downside door was opened further with the SP500s weakness, but at the same time the further selling, particularly the SP500 undercut of the 200 day, sets up a rebound to test the breach. The question on these moves is whether it unleashes a lot of short covering and buying that reverses the downtrend or if it is just a relief bounce. Thus far the market has shown no inclination for the former as it has squandered several set ups to make the move higher.

THE ECONOMY

June consumer prices rise below expectations.

Overall prices rose 0.3%, just over the 0.2% expected (0.6% in May). Year over year that was a 3.3% gain, the largest gain since May 2001. The core rose just 0.1% versus 0.2% expected, and that was the slowest rise in 2004. Year over year core prices rose 1.9%. The Fed had discussed transitory factors influencing inflation higher thus far this year (namely energy), and stripping out food and energy the lower core indicates that is the case. Energy rose 2.6%, down from 4.6% in May. Food prices climbed 0.2%, but that was down from Mays 0.9% gain. Thus the elements stripped from the core showed slower growth, and when taken from the core it was still slower. That means that prices for everything in the core rose at a slower pace even more than the prices for energy and food. In sum, prices are still rising, but the big spike in price pressure is abating or has abated.

This always raises the issue as to whether the governments statistics accurately reflect prices consumers are paying. Education is notably left out of the calculation, and we all know that education costs rise semester after semester. Still, the prices being measured are constant, i.e., the group is not changed, Thus those prices being measured, regardless of whether they leave out some key areas, still show the relative change in those items month to month. Unless the numbers are out and out being cooked, they show the price trends of those items included in the report.

China GDP rises at a slower pace.

Similar to US consumer prices, Chinas GDP rose a sizzling 9.6% for Q2, but that was below expectations of a 9.8% gain and down from the 10% in Q1. Incredible growth, but it is being slowed by the government tightening the lending parameters. This is the start of the soft landing China and the rest of the world has been talking about. Gee, they also called the US stock market crash in 2000 and the plunge in GDP from 7% growth to negative a soft landing. Ask those thousands and thousands of companies that were crushed on the rocks as the economy plunged as well as the millions who lost their jobs and big chunks of their retirements about soft landings. Whenever the government starts tinkering with an economy, there is reason to fear. Todays soft landing is tomorrows tailspin out of control.

That is an overstatement at this point, but it is worth remembering that the US economy was considered too strong by the rest of the world and the Fed was pretty much forced to hike rates by peer pressure. Once it started on that path it did not know when to quit. Further, the economy was already showing wear and tear that the Fed ignored as it continued to raise rates. Just something to note as the months unfold.

Economic articles still talking of slowdown, but the real slowdown is a ways off.

A perusal of weekend reports on the economy still lean heavily on the idea that the consumer is slowing along with the rest of the economy. As is usual the stories lag the real events, mirroring the reports that are already history as opposed to focusing on the leading indications. The regional reports from New York and Philadelphia were huge with respect to the size and breadth of their gains. We note that they were the leading indicators of the slowdown in the economy, starting to fall off in May before the other areas slowed. Now they are revving up again. This is how it happened with the overall economy as well when it was coming out of the long decline: the regional reports started showing life. A few months after they turned to expansion the overall economy did the same. They are very good leading indicators.

That does not mean that the economy is ready to bolt higher again with 7% growth. It is a resumption of steady growth. The real kicker in growth will come in Q4 as the last of the tax incentives are taken advantage of. That will jump Q4 up to a handsome level. It wont carry that pace over into 2005 because there wont be the push to invest before a deadline. After that you have an expansion that is going on 26 months (measured by the October 2002 market bottom, the true measure). It will still have more ahead of it, but at that point we have to look at the new administrations economic policies as well as control of the Congress to see if the administration will have the ability to get anything passed. Even with no action, however, many key tax cuts will start to sunset, and that will have an adverse effect upon continued growth.

THE MARKET

The market could not respond positively to good news, at least not after the first few minutes of the session. Dells raised guidance, IBMs solid earnings, a slow CPI all gave rise to a better pre-market and open. Once again, however, stocks responded to decent news with a reversal as not enough buyers came in to support the move. Once again sellers jumped on late after the buyers packed up their wallets. Volume rose as the selling increased, NASDAQ dove toward the May lows in its trading range, and SP500 undercut its 200 day SMA. Classically weak action intraday and on a macro basis as well.

Market Sentiment

VIX: 14.34; -0.37
VXN: 20.94; -0.74
VXO: 15.35; -0.38

Put/Call Ratio (CBOE): 1.12; +0.29. The third close over 1.0 in two weeks. A couple more of these will swing sentiment enough to help foster a bounce. There is more hedging going on as well as downside speculation as seen in our discussion of the NYSE short interest Thursday night. The market is starting to get oversold enough to bounce, but as of yet has squandered all of its recent opportunities to do so.

NASDAQ

Had the impetus to rally with Dells news, but an early gap higher was over before it started and the selling as well as volume expanded as stocks dove in the last hour.

Stats: -29.56 points (-1.55%) to close at 1883.15
Volume: 1.792B (+7.08%). Third above average volume session in a row, and two of them on rising volume, indicating the big money was selling their shares, the fifth such instance in just this month. This type of selling begets more selling, heading toward a showdown with the May low. We do have to consider it was expiration Friday, and that pushes up volume.

Up Volume: 264M (-497M)
Down Volume: 1.512B (+654M)

A/D and Hi/Lo: Decliners led 2.26 to 1. With chips on the plunge as well, breadth was pretty ugly.
Previous Session: Decliners led 1 to 1

New Highs: 41 (+7)
New Lows: 161 (+47)

Another gap higher on some once again good news was given back, this time hard with selling volume. It was expiration, but volume accelerated late in the session as the selling worsened, a clear sign of distribution. NASDAQ is heading toward the May low (1876 closing, 1865 intraday), and with the strong selling volume it looks ready to undercut the trading range/base for the year. That opens the door toward 1775, the October 2002/March 2003 up trendline or 1755, some July 2003 highs. Before that happens it will rebound in a relief bounce if indeed it does not reverse and climb back up in the base. After undercutting the May low the index, already oversold, will be well oversold. Many bets on a further fall will be placed given the break below the low. That often sparks the rebound as those that are going to sell have done so on the breach, and speculate on more downside. At that point the sellers are at least temporarily sated and start covering. That helps are rebound move get started.

QQQ is in full retest toward the March and May low at 34. That level is pretty solid support and will tell us a lot about how the overall index is going to react.

S&P 500/NYSE

After DJ30 cracked its 200 day SMA last week, SP500 wasted little time in doing the same on some rising volume.

Stats: -5.3 points (-0.48%) to close at 1101.39
NYSE Volume: 1.447B (+2.95%). Volume was up and above average again as the large caps slightly undercut the 200 day SMA. Rising volume breaches are particularly noteworthy as a large number of institutional investors are taking part in the selling. If it does not recover rather quickly it typically leads to more selling as the 200 day is what we call support of last resort.

Up Volume: 554M (-3M)
Down Volume: 882M (+49M)

A/D and Hi/Lo: Advancers led 1.11 to 1. Was much stronger while the small and mid-caps were sporting gains.
Previous Session: Advancers led 1.18 to 1

New Highs: 145 (+34)
New Lows: 52 (+8)

SP500 tried to hold the 200 day SMA (1103), checking up at that level in the last hour but ultimately unable to hold it as the selling expanding near the close. It was not much of an undercut at this stage, but it needs to make a quick recovery. When institutions sell through the 200 day SMA (evidenced by rising, above average volume selling), that spells even further trouble for stocks as the big money is getting rid of them, not even wanting to hold them at this low level. SP500 is still easily above its March low near 1090 and its May low at 1080 to 1075. If there is no quick recovery of the 200 day then it is open to sell down to 1075 where there is also some December 2003 support from a consolidation.

We suspect that there will be more selling, perhaps on sharp volume, that takes SP500 toward 1075. It may not make it that far, however, before it is oversold enough to provide a relatively solid relief bounce or even a real turn back up from this selling.

SP600 yet again traded above the 50 day EMA, and yet again failed to hold the move. It sold back to the 50 day SMA, again trading in the narrow range between those to moving averages the past week. Still holding up, but no move to jump into these stocks as they test the key 50 day EMA. Dont see a lot of pressure on the small caps, but we do note they gave up a nice intraday gain and then some.

DJ30

Rallied intraday to recover the 200 day SMA (10,202) but in the repeat of afternoon reversals, it sold off and broke below the recent lows of this month. Under distribution with first INTC and now IBM the index looks ready to test 10,000. indeed, that level seems to be drawing it down as it did in March where it held. It has been unable to move above the 2004 down trendline, and this recent resumption of distribution points toward a test of 10,000, but we anticipate a rebound attempt before it gets to that level, though we do not anticipate that rebound to make much headway.

Stats: -23.38 points (-0.23%) to close at 10139.78
Volume: 267 million shares Friday versus 232 million shares Thursday.

THIS WEEK

A bit light on economic data, and nothing until later in the week. Of course earnings reports will be released at a furious pace, and that will continue to give the market some impetus overlay in addition to the macro concerns about a slowing economy and the election ahead as well as terrorist threats.

The market finished weak with NASDAQ selling hard toward the May low and SP500 undercutting its 200 day SMA. The Monday following expiration is often the reverse direction, particularly if the move is strong. That has not held the past few expirations, however. What we want to see is further selling that takes NASDAQ to the May low (1876 closing, 1865 intraday) and SP500 to further undercut its 200 day toward the March low (1091 closing, 1087 intraday). That would set up a nice point to rebound and it would put the market in an oversold enough and fearful enough condition to do it.

Whether that is just a relief move or has more substance will be seen in how volume responds and how leaders perform. Leaders are coming under pressure one by one, group by group. Friday the internets were hammered on NFLX results. Retailers were hurt by HOTTs announcement about a down quarter ahead. Medical appliances, a heart and soul market leader, was hurt bad by SYKs results and guidance. When leaders stumble, the market has nothing to hold it up. Thus at this stage a rebound has to be viewed as a relief move until proven otherwise.

That is not all that bad, however. The market has been in a trading range, and another crash lower to test or slightly undercut that range would set up another run higher in the range. That gives us upside opportunity, though we have to assume the move is a trading range bounce as opposed to a breakout to a new high. We will look for stocks that are coming off support, testing breakouts, and of course, setting up to breakout as well. Friday the breakouts were in the oil and gas sector, but as the market hits bottom we will be looking at the other areas that have set up quietly even during the selling as well as those stocks coming off of their 50 day EMA and other support to ride a bounce higher.

Support and Resistance

NASDAQ: Closed at 1883.15
Resistance:
March 2004 lows at 1900
The 10 day EMA at 1936
The 18 day EMA at 1955
The 50 day EMA at 1972
The 2004 down trendline at 1974
The 200 day SMA at 1982
2024 is the June high.
2050 represents some prior price points and has stopped NASDAQ the last three times it has tried that level.

Support:
The May 2004 lows (1876 closing, 1865 intraday).
October 2003 low at 1865.
The October 2002/March 2003 up trendline at 1775.
July 2003 highs at 1755.

S&P 500: Closed at 1101.39
Resistance:
The 200 day SMA at 1103
The 10 day EMA at 1113
The 50 day EMA at 1121
1125 was key price support.
The March/April down trendline at 1126
1142-1146 are the June highs.
The April and January highs (1150 to 1155).
Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.

Support:
1096 to 1100
1090 is the March low
May low at 1080 to 1075

Dow: Closed at 10,139.78
Resistance:
The 200 day SMA at 10,202
The January/April down trendline at 10,265
The 50 day EMA at 10,275
Late April peaks at 10,478 to 10,512
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high

Support:
March low at 10,007
May low at 9852 intraday, 9906 closing

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the Economy section.

July 20
- Housing Starts, June (8:30): 2000K expected and 1967K prior
- Building Permits, June (8:30): 2000K expected and 2097K prior

July 22
- Initial Jobless Claims, 07/16 (8:30):

July 22
- Leading Economic Indicators, June (10:00): 0.3% expected and 0.5% prior