An unholy trinity of negatives is weighing on equities: From the G7 meeting, we got weak dollar to start off the week; Pre-announcements from firms across varied sectors – Level 3 Communications (LVLT), Verizon (VZ), Viacom (VIA.B), Dupont (DD), Kroger Co. (KR), and the New York Times Company (NYT) – added to the worries; Lastly, the surprise cut in oil output by OPECsent crude prices higher.
On top of all this, signs are now appearing that the consumer is starting to fatigue. That’s a very large potential danger to the broader recovery. The spendthrift consumer has been the backbone of the economy, while business spending has been AWOL during the past three years.
But why are these issues having resonance, and why now? These factors arise at the point in this rally where the markets have become ripe for consolidation. The pundits and gurus will pick whichever excuse they find to be most convenient to their models, and use them as justification for the recent sell off.
How the markets’ internals respond to these pressures will be more telling than these underlying issues actually are.
Technically, Monday was the first heavy volume breakdown in Price since this rally began. The bounce back on Tuesday was on light volume, setting up Wednesday’s heavy volume sell off. This suggests that we may be entering a distributive phase of the rally. While the longer term trend remains upwards (we have not violated that red trend line), internals are weakening somewhat as the Bulls tire.
There are other signs that the market needs to take a breather. The advance/decline ratio has weakened, as has the up/down volume. For the first time since March, Price is diverging from Momentum.
The bottom line is that corrective action is necessary for healthy market anyway. As the nearby chart reveals, what’s at risk presently is not the six month old rally, but rather, the more recent, fast-rising and frothy channel. In our opinion, this suggests a mild (5-10%) pullback from the peak towards recent breakout levels. On the Nasdaq, that’s 1760 or so; The psychologically important SPX 1000–1010 is the 1st level to watch; the next is 965 or so. On the Dow, 9310 is the zone to watch.
Chart of the Day
Intermediate term trend (red line) still very much intact; The breach of the recent move (green line) suggests a pullback to support in the 1760-1780 levels.
Nasdaq 6 Month Chart
Support levels are not far below present levels; Corrective activity should be limited to a 5-10%. Internal trends (and near level supports) suggest corrective activity should be shallow.
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Quote: “Life is like a great big grinding wheel. Whether it wears you down or polishes you up depends on what you’re made of.” -Author Unknown