Sailing through the Dog Days of Summer

As we enter the historically weakest part of the year, lets review the factors presently impacting the markets:

Earnings News: The recent mix of good and bad news comes at the end of an extended rally. While the positives (INTC, GM, C, NXTL, CAT) are already “baked into the cake,” the negatives (NOK, F, LU, EMC, IBM) demonstrate that companies still retain the ability to surprise.

Internals: Have also been a mixed bag. Sell offs have been on fairly strong volume, with yesterday the 3rd day in a row where the markets could not hold its strong opening. New 30 day lows (see chart) are starting to tick up as “fatigue” sets in; Yet we continue to see the Market close off its lows.

Technicals: The NASDAQ has been the leader of the market, and remains the strongest index. Key support levels include 1678, 1602, and 1560. The Dow has been flirting with its uptrend, and could break through to the downside today. 9000 is psychological support, but the breakout level of 8725 remains key. Unlike the Dow, the SPX did break its uptrend line, and has some support at 975, and then 950. The SPX has been in a high “rolling churn” for the past month. Since mid-June, on relatively strong volume, it has failed to make fresh highs; As the Bulls start to exhaust their ammo, an intermediate top is forming; Look for the SPX to consolidate and make partial retracement of gains.

Bond Markets: Greenspan’s testimony spooked the bond ghouls, indirectly threatening the equity rally. The Bond sell off made yields rise, thus making Fixed Income more attractive; If the 30 year produces a risk-free 5+%, expect to hear a giant sucking sound as the money market-to-equity funds flow morphs into a money market-to-Bond flow. After the big run up, asset rotation from big SPX holders (locking in profits) to the long Bond is also likely.

Crosscurrents: Previously, we’ve discussed the opposing forces roiling the market: Historic levels of government stimulus are fighting a weak yet improving economic backdrop. “Tide versus the Wind” is how sailors describe it. Ask anyone who’s ever tacked against the wind what happens when the forces of nature are opposed to each other: You get a choppy ride without much progress. Investors should expect this bumpy ride within a trading channel for the rest of the Summer, as the powers that be do battle.

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Quote of the day: “The dissatisfaction of the masses is not based on economic deprivation but on a sense of ineffectuality. Not an increased standard of living, but more social power, is their fundamental goal. Because of their emotional orientation, they arise and act when a powerful leader-figure can coordinate them into a functioning unit rather than a chaotic mass of unformed elements.” Philip K. Dick, Vulcan’s Hammer (1956)

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