Forget Europe – Even China Showing Breakdown

by Serge Berger | July 8, 2011 12:05 am

In many ways yesterday’s trading session for the S&P 500 INDEX, RTH and the Nasdaq Composite (INDEXNASDAQ:.IXIC) felt much like those of last week: a gap higher followed by a steady climb for the rest of the day.

All in all it was a snoozer of a session, especially as the afternoon came around and few players wanted to lean out of any windows ahead of the June jobs report today. In terms of this morning’s nonfarm payrolls number, the consensus for the month over month change is +110,000.

The high beta leading stocks continued ripping higher, which reminded us that however extended a stock might be, it is a dangerous game picking tops just as it is picking bottoms in the S&P 500 Index and the Nasdaq Composite.

As performance-chasing by fund managers is likely a good part of this most recent rally, it is not smart to pile into many short positions even just for quick trades until we get first signals of a near-term top building process.

If on Monday of last week you would have asked investors where they thought the S&P 500 would be trading at just eight trading sessions later – the morning of the June jobs report, how many of them do you think would have guessed 1,355? I bet very few if any would have given you that number. My point is that a) it’s been an insane vertical rally over these past eight trading sessions and b) as usual the stock market proved most people wrong.

For those of you keeping record, over the past eight trading days the S&P 500 rose 6.75%, the Russell 2000 rose 7.50%, and the Nasdaq 100 rose an astounding 8.80%. Unprecedented? Nope, but it can’t continue at this pace.

Speaking of the Nasdaq 100 (NASDAQ: NDX[1]), this index reached a new intraday high for 2011 today and closed just a smidge off the closing highs for this year from April 27.  On the Nasdaq yesterday up volume massively outpaced down volume and leading stocks like Apple (NASDAQ: AAPL[2]) and Amazon (NASDAQ: AMZN[3]) spearheaded the way higher. All in all this is healthy action although total volume could be somewhat better. Of course after this massive eight day rally it would be ill advised to chase stocks higher before some good consolidation comes around.

INDEXNASDAQ:.IXIC nasdaq index

Although select chart breakouts in leading stocks such as in (NYSE: CRM[4]) are enticing to trade, I find it too little too late in this rally, especially as today’s June jobs report has the potential to induce meaningful volatility into this one-way tape.  That’s as much as I have to say for yesterday’s price action.  Stocks are near-term extended and we shall reevaluate after price action has time to settle in post the jobs report later today.

I now want to show three charts that give some thought to the macro picture because I sense that as we look towards the end of the summer/beginning of the fall more market turbulence could come upon us.

The first chart is that of copper.  I showed this chart last week but thought it worthwhile to point out again as it contradicts the next two charts.  As an industrial input, higher copper prices often indicate more industrial production/global growth and the recent spike in copper gives bulls something to lean against for their thesis.

copper futures

On the other hand, while the bond market traded lower last week, if we look at the 10 year U.S. Treasury Notes futures contract on a multiyear chart we clearly see this longer-term trend of higher bond prices still intact.  Higher bond prices as it relates to the ‘still’ high quality U.S. government bonds indicates risk aversion on the part of global investors and as such not a great deal of optimism for global growth.  As bond markets tend to lead the stock market it is worth keeping a close eye on them.

10 year treasury notes futures

And thirdly, yesterday I showed the chart of the blue chip stock index in Spain, the IBEX 35, which looked rather precarious to head lower.  On that same theme, please note a similar pattern in the Chinese stock market as measured by the Morgan Stanley China A Share Fund (NYSE: CAF[5]).

shanghai composite etf

For all the great talk of the global growth engine that China is and will be, there are plenty of issues to there too to point fingers at and the chart shows at least some potential of a breakdown.  I will be keeping a close eye on these charts as the still massive global economic issues further unfold in coming months.

Serge Berger is the head trader and investment strategist for The Steady Trader[6]. Sign up for his free weekly newsletter[7].

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