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Sunday, August 28, 2005
Market Recap
The stock market continues to bleed slowly because of the seasonally slow August trading volume. The DOW lost 53 points on Friday, the NASDAQ was down 13 points and the S&P shaved off another 7 points. As the market drifts lower on light volume, it is getting very close to the danger zone and with September just around the corner, the market is in a very vulnerable position. Historically, September is the worst month of the year for the market and normally cumulates with fallout and bottoming process in October. There is no guarantee that history will repeat itself but things are certainly shaping up for a repeat performance.
There should be one more week of light volume trading and then after Labor Day, volume should pick up. Hopefully by that time, the S&P and NASDAQ will be down to support levels and buyers will emerge. However, with the current economic situation, it is going to be hard for anyone to commit to this market on the long side and this may result in some heavy selling when volume increases in September. We have charts of the major indices along with many others tonight to update you on the current situation.
Support Levels and Slow Stochastic
In last week's commentary, we mentioned support for the DOW would be near 10400, for the NASDAQ support would be 2100 and for the S&P, 1190. Friday's close on the DOW was 10397 with a slow stochastic reading of extremely oversold. The NASDAQ is still 20 points higher than its 2100 support level so we could see more selling this week, however, it currently remains even more over sold than the DOW. The S&P is also way oversold according to the stochastic indicator but is still 15 points above its 1190 support area we mentioned. The revised support level for the S&P is now 1195. This is the 200 SMA and it moves higher each day so that is why the level has been revised up from last weeks 1190 number. Both stocks and markets can remain oversold for long periods of time if the market is trending, so we cannot assume that a bounce is near just because there is an oversold reading. The slow stochastic indicator is very reliable in flat markets but we are in a short term trending market where the stochastic indicator cannot be depended upon as much. The trend over the last 3 weeks has been down but since the slow stochastic is oversold and all indexes are near support levels, there is a very good chance of a super bounce coming very soon. We have chosen several charts tonight so that you can realize just how many indexes are at or very near support levels. Therefore taking new short positions at this time could prove to be very dangerous.
GreenSpeak
Some economic indicators out last week are starting to reflect that there may be another "soft patch" underway. As a result, many interest rate sensitive stocks are breaking down technically including the home builders and bank stocks. Meanwhile, Greenspan spoke Friday and his remarks spooked the housing sector stocks. It seems that the Fed remains worried about elevated energy prices and speculation in housing. Greenspan said that housing was an "economic imbalance". This tells me that we can expect the Fed to tighten rates too much in order to slow housing, much like they did in 2000 to slow the so called tech bubble in the stocks. If they overdo the rate hikes like they have had a history of doing, stocks are going to suffer considerable downside moves and you should be prepared to go to cash or sell short to protect your portfolio from the extreme risk that the market is facing, if the above mention support levels are breached.
Yield Curve Signals Bear
The yield on 10-year treasury note has so far held above support at 4.15%. However, the yield differential between the Fed funds rate is below 1% and declining rapidly, squeezing bank margins. As we have mentioned before (business cycle commentary located in the topic section) a flat yield curve (when the differential approaches zero) is detrimental to the profitability of banks, who pay mostly short-term rates to depositors while charging long-term rates to borrowers. This flat yield curve has throughout stock market history been a long-term bear signal for the entire stock market and we are on the verge of breaking support on the indices as the yield curve heads to the flat zone. This is a heads up to all to remain cautious.
Our STHQ portfolio is acting very strong, holding up very well in the last 3 weeks of selling. This is a good indication that we are in strong stocks that will rebound strongly when and if the market does. However, even the strong stocks cannot overcome a flat yield curve induced bear market. So keep those stops in place and keep your eyes on the financial stocks for possible short positions. They will collapse before the yield curve gets to zero.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
Stockcharts Listing
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