A profit warning by Chevron (CVX) and lower-than-expected consumer confidence numbers conspired to drive prices lower on Friday. It was the fourth week in a row that both the Dow Jones Industrial Average (DJI) and the S&P 500 (SPX) lost ground following a very brief period when the S&P actually showed a gain for the year.
Nine of the S&P’s 10 sectors fell on Friday. Only technology showed a modest gain, while financials took the hardest hit, down 1.3%. For the week, the energy sector was the worst performer of the S&P’s 10 sectors, off 3.8%, industrials were down 2.7%, and basic materials were off 2.9%.
The University of Michigan said that their index of monthly consumer sentiment declined sharply in July versus June. The index fell to 64.6 in July from 70.8 in June, and kept investors fearful that the recession is going to last longer than anyone predicted.
At Friday’s close, the Dow was down 37 points to 8,147, the S&P 500 was off 4 points to 870, and the Nasdaq (NASD) gained 3 points to 1,756.
The NYSE traded just 922 million shares with decliners slightly ahead of advancers. The Nasdaq crossed 558 million shares with advancers slightly ahead of decliners.
On Friday, crude oil (August contract) fell 52 cents to $59.89. It was the first time in two months that oil has closed below the $60 mark. The Energy Select Sector SPDR (XLE) fell 32 cents to $44.67.
August gold fell $3.70 to $912.50 an ounce, but cut its losses from a low of the day at $906.60. The PHLX Gold/Silver Index (XAU) fell 30 cents to $129.99.
For the week, the Dow lost 1.6%, the S&P 500 was down 1.9%, and the Nasdaq fell 2.3%.
What the Markets Are Saying
Most technicians, including this one, are adamant that both the Dow and the S&P 500 have broken the neckline of a head-and-shoulders formation.
However, I am surprised that the market has not followed through with the selling that gradually builds into a crescendo of executed stop-loss orders. Instead, volume was the lowest of the year on Friday, with breadth just about even.
Our internal indicators are now oversold, but the sentiment numbers are mixed. U.S. advisers, as reported by Investors Intelligence as a contra-indicator, show that the bulls rose to 42.7, up 1.3%, and the bears rose to 30.3%, up 0.4%. That confirms that the breakdown of the stock averages is genuine.
However, the American Association of Individual Investors (AAII) numbers, which reflect the public’s attitude, are now just 27.91% bullish and 54.65% bearish. Contrast that with the bottom of the market readings on March 5 (bottom made on March 6) when the bulls were at 18.92% and the bears at 70.27%.
And another sentiment indicator, the CBOE Volatility Index (VIX), fell on Friday to 29.02, suggesting that the markets may flatten out.
Perhaps things will become less murky following this week’s major reports, which include earnings reports from the likes of CSX Corp. (CSX), Goldman Sachs (GS), Johnson & Johnson (JNJ), Intel (INTC), YUM! Brands (YUM), JPMorgan Chase (JPM), Google (GOOG), IBM (IBM), Bank of America (BAC), Citigroup (C) and General Electric (GE).
The economic calendar brings the latest data for PPI, retail sales, CPI, industrial production, initial claims and housing starts, as well as the minutes from the June 24 Federal Open Market Committee (FOMC) meeting.
Meanwhile, traders should hold short positions and add to them, but enter stop-loss orders just in case of a strong rally. They should also lighten up on underperforming longs.
Chances are high that this week will reveal the true direction of the market as near-term down.
Today’s Trading Landscape
Earnings to be reported include: Bank of the Ozarks (OZRK), CSX Corp. (CSX), Fastenal (FAST), Magal Security Systems (MAGS) and Novellus Systems (NVLS).
Economic report due: the June Federal Budget Balance.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of his most recent market outlooks.
