Indicators Stuck in Neutral; Will Market Reverse?

Good news from the economy and a positive reaction to it by bank stocks yesterday resulted in broader rally that took all 10 of the S&P sectors higher. It was the third-straight session of higher prices.

Initial jobless claims for the week ending Aug. 15 were higher than expected and so the market opened lower. But the market turned mid-morning on news that the Philadelphia Fed’s activity index rose 4.2 in August after a negative number in July and economists had been predicting another negative number. The result shows that manufacturers have moved from drawing down stockpiles of unsold goods to increasing production, and that usually occurs at the end of a recession.

The financial sector was the chief beneficiary of the good news from Philadelphia. But even some of the battered retail stocks showed marked improvement despite disappointing earnings from Sears Holdings (SHLD) which reported Q2 figures of 17cents versus estimates of 35 cents. The stock fell 11.88%.

But, despite the gains, it wasn’t all positive: GameStop (GME) posted poor earnings, down 32%, but the stock gained 0.9%. And natural gas futures hit a new seven-year low.

At the close, the Dow Jones Industrial Average (DJI) gained 71 points to 9,350, the S&P 500 (SPX) rose 11 points at 1,007, and the Nasdaq (NASD) gained 20 points to close at 1,989.

The NYSE traded just over a billion shares with advancers ahead of decliners by 11-to-4. The Nasdaq traded 584 million shares with advancers ahead by just under 2-to-1.

The expiring September crude oil contract gained 12 cents to $72.54 a barrel, and the Amex Energy SPDR (XLE) advanced 43 cents to $50.91. Gold (December contract) fell $3.10 to $947.70 an ounce, and the PHLX Gold/Silver Index (XAU) rose $1.34 to $144.22.


What the Markets Are Saying

As the Dow (DJI) and its companion indices approach the top of the current trading range, most of the internal indicators that we rely on are either neutral or slightly overbought. And the sentiment indicators, chiefly ones that look at so-called “smart” investors (like corporate insiders and institutions) and so-called “dumb” investors (like odd-lot buyers) are neutral, too.

So, we will consider another approach. As the markets rise close to their prior highs, most technicians — me included — conclude that the chances of a breakout increase with higher volume and decrease on low volume.

With that in mind, the recent pattern of trading, which began with the “breakout” of July 30 through the recent rounding tops, to last Friday has produced average volume of just 1.29 billion shares on the NYSE. The highest day of volume during that period was on Aug. 5 at 1.88 billion shares. This was two days prior to the actual top at Dow 9,437 on Aug. 7, when just 1.4 billion shares were traded.

The lowest volume was on Aug. 13 at 777 million shares when, for the third time, the Dow failed to break to a new high and the Dow fell for two days to its initial support zone.

Conclusion: Our internal and sentiment indicators are neutral, so we look to volume for guidance. But based on the very low average volume this week, compared to the prior 12 days of higher volume (but still low by historical standards) which failed to produce a breakout, the chances of a sustained new breakout are not good. Traders should book profits and move to the short side of the market.


Today’s Trading Landscape

Earnings to be reported include: AnnTaylor Stores Corp, J.M. Smucker Co, and Met-Pro Corp.

Economic reports due: Existing home sales (the consensus expects 5 million).

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