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NEWS FROM CHINA DID WHAT NEWS from the U.S. could not do — get the bears off their backsides to seize control of the market.
After a week where the Dow Jones Industrial Average barely budged from daily close to daily close, the possibility that China was not going to prop up the global economy finally got things moving.
With the rising trendline from the June low now broken to the downside and the bond market forging ever higher, the financial markets seem to have lost faith in the recovery (see Chart 1). And for investors, that means it is time to hunker down again as major support for the Standard & Poor's 500 does not come into play until the 1030 area.
Chart 1
In midday trading Wednesday, the S&P 500 was trading at 1092.
Last week, the market's resilience in the face of weak employment data was indeed a bit of bullish evidence. Even Tuesday's intraday recovery following a rather dour Federal Reserve outlook suggested that the bulls were not giving up. When stocks hang tough under a daily barrage of bad news it means there is demand. Typically, this foreshadows an upside breakout.
The whole thing flips to bearish, however, when the bulls fail to drive the market higher within a reasonable amount of time. What is "reasonable" is subjective, but I have found that a week is a big enough window. Failure to break out, in my view, saps whatever bullishness was derived from market resilience. In that case, it will not be able to shrug off the next bit of bad news that appears.
Fears of an Asian economic slowdown and a reported wider-than- expected trade gap here were enough to do the trick.
Many analysts, including me, questioned the June-August rally due to a longer-term view that the market was not out of the woods. A rather positive earnings season took the spotlight away from lingering European debt problems to give us one of the better Julys in recent memory. Technically, the rally was broad based and, despite low volume, its ebb and flow was good.
But even with a positive "tape" there were two major problems, in my opinion.
The first was something I saw earlier in the summer: Reactions by individual stocks to their own earnings were still not great. The broad market cheered the good news, but many earnings winners were share-price losers. For example, on July 20 appliance maker Whirlpool (ticker: WHR) announced that it doubled its second-quarter profit, beat expectations and raised its outlook. The stock fell nearly 3% and has been falling ever since.
The second problem was the bond market. Monday, I wrote that Treasury and corporate bonds were signaling problems for the economy and for the stock market, by extension (see Getting Tech, "Don't Ignore the Bond Market's Worries," Aug. 9, 2010). The rush into fixed income and for Treasuries — the rush to safety — was a vote of no confidence for the rallies in "risk" markets such as stocks, copper and crude oil.
There were also other subtle clues. Tom Bowley, chief market strategist at InvestedCentral.com, remarked that the financial sector led the 2010 advance to the April high but faded as the market peaked. Having this influential group lagging "is never a good sign," he added.
He also pointed out that while the Dow industrials moved above their June high, the S&P 500 did not. In other words, the S&P 500 did not confirm the breakout by the Dow.
With the rising trend from the June low now broken to the downside, it would seem that price action is reacting to the negative backdrop.
If the bears remain in power, major support for the S&P 500, as mentioned earlier, exists in a zone around 1030. For the Dow, it would be in a zone around 9700. If and when they get that low, we can look at the odds for a rebound.
Getting Technical Mailbag:Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Comments? E-mail us at online.editors@barrons.com
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