Stock Market Analysis

Monday, August 31, 2009

Dow Drops in Response to China Drop

The Dow closed down by almost 48 points today in a weak start to a heavyweight week of economic numbers in response to a huge dip in the China market. Indeed, whenever the China market close down by more than 5%, the US market seem to respond to it by opening significantly lower and then staying low for the day like what we saw today. As such, I would see today's dip as more technical than anything.

Fundamental Analysis
Yes, the first new week of each month are heavyweight weeks as the most influential of economic numbers such as the ISM index and the Jobs Report are released (see Stock Market Calendar). The Chicago PMI released today beat consensus, turning in at 50, suggesting the bottom of the recession for the region for the month of July. A number above 50 suggests expanding business activity while a number below 50 suggests contraction in Chicago. The Chicago PMI has been below 50 since this economic crisis begun in 2008 which is what makes this return to 50 such an important event. We could see a boost to the market if the ISM index beats expectation of 50.5 tomorrow.

Technical Analysis
Today is really just another sideways day, the 6th sideways day, for the day. Such sideways movement following huge one day gains are useful for digesting some of the short term overbought sentiment created by those huge one day rallies. In this case, it is the rally of 21 Aug that it is digesting. In a weak bull trend like this one, the Dow cannot be expected to trade very far above from its 30 days moving average and periodic breach of the 30 and 50 days moving average into a short term pullback should also be expected. Such is the characteristic of weak bull trends.

For now, the Dow remains in all out bull trend.

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Thursday, August 27, 2009

Dow Sideways Despite Unchanged GDP

The Dow continued to move sideways today, gaining a marginal 37 points or 0.39% despite a favorable Q2 GDP revision.

Fundamental Analysis
The revision to Q2 GDP was widely speculated to be a negative one due to the huge rebound in the initial number. However, it was held unrevised vs the consensus of correcting down to -1.5% from -1%. Even though jobless claim was slightly higherthan consensus due to its volatile nature, it didn't stop its 4 weeks moving average from contiuing its trend downwards. So far, every economic number has been screaming and supporting economic recovery so, where are the buyers?

Technical Analysis
The stock market has always been more technical biased than news biased, which is why its behavior continue to baffle amateur options traders worldwide. As I have always said, 3 to 5 days of sideways or slightly downwards days follow huge single day gains are common and healthy market behaviors. It allows the short term overbought condition created by the single day rally to be worn off and allows the short term moving averages which represents support for short term and intermediate term trends to catch up, reducing the possibility of huge draw downs. In fact, drawing back down to the 30 days moving average line before rebounding to new highs should not surprise you. This is why this is the market for longer term traders or day traders.

For now, the Dow is in all out bull trend.

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Wednesday, August 26, 2009

Dow Sideways Despites Great Numbers

The Dow gained a marginal 4.23 points (0.04%) today for a 7th straight day as another slew of great economic numbers fought against a weak and unwilling market.

Fundamental Analysis
Durable goods orders, which is a forward looking indicator of future economic performance based on the amount of factory hard goods ordered the past month, beat consensus of 2.5% with a surprising 4.9% and beating last month's -2.5%. This number definitely points towards future economic growth as it is also the highest level of durable goods order since this crisis begun! However, investors were unmoved by this great number as it has already been priced into the market in the rally a few trading days ago. However, investors were taken by a surprisingly strong New Home Sales number that beat the consensus of 390K with 433K. Yes, the housing market has been the thorn in the flesh of all investors even before this market crisis begun and that thorn seems to be slowly getting pulled out at last. A healthy housing market is necessary ingredient to a healthy economy. Now that most of the unhealthy practises and loans are out of the market, the housing market can now be on the warpath to recovery once again, attracting real investors with real money. Without today's great new home sales number, the market could very well end up in the red. Investors will look forward to tomorrow's GDP revision for some more optimism (see Stock Market Calendar)

Technical Analysis
Technical analysis has a way of cutting through the bullsh*t and getting to the point. So, what really happened today? NOTHING. Like I said before, a few days of sideways or slightly negative days following huge one day surges are common technical behaviors caused by profit taking after strong single day rallies. Especially in a weak bull trend like this one which is made up of a few big moves intersected by lots of small or negative moves. Clearly the Dow is now in a volatile bull trend or what some calls a weak bull trend where investors continue to be cautious of positive news and take quick profits. This is a textbook behavior of investors during market reversal points as all finance professionals have learnt in school. So classic. Such sideways or negative days actually make for better entry points for those who has missed the show so far.

For now, the Dow is in all out bull trend.

Monday, August 24, 2009

Just a Sideways Day...

As expected, the Dow went sideways today following last Friday's surge, gaining a marginal 3.3 points or 0.03%. A few sideways or slightly negative days usually follow big single day surges due to profit taking.

The US market continues to be bullish as average trading volume continue to rise and short term momentum indicators making higher lows, supporting the rally.

Yes, the recovery in the US market really isn't as straight forward as the recovery we saw in the BRIC nations. After such a painful lesson, we saw that investors are taking profit in realistic amounts and not holding on for explosive profits like they used to do. Most investors are behaving more like traders as profits are taken off the table quickly, resulting in less than straight forward bull trends.

Well, there is no doubt that the world is walking out of this economic crisis and even though all of these takes some time more to translate into jobs in the economy, we can all be sure that investors are already pricing it all in right now.

For now, the Dow continues to be in all out bull trend.

Sunday, August 23, 2009

Dow Breaks Out!

The Dow staged a surprisingly strong breakout, gaining 155 points, last Friday as Uncle Ben issued the most optimistic speech on economic outlook since this economic crisis begun.

In fact, Bond Yields rose sharply across the board in response to the higher inflation outlook and the reallocation from bonds back into equities. Put Call Ratio also fell to recently unseen lows as speculators rushed into call options. Short term momentum is once again bullish as the Dow wore off its short term overbought sentiment in the month long neutral trend.

The breakout last Friday was extremely significant in the way volume surged as well. This is the highest trading volume we have seen in a month. It really felt like investors were cheering and celebrating as they welcome the great economic outlook and the coming GDP revision. However, as I always said, a few sideways or downwards day usually follow a strong up day so don't be surprised if it does. It only makes better entry points.

For now, the Dow is in once again in all out bull trend.

Wednesday, August 19, 2009

Dead Cat Bounce?

The Dow gained 61 points today as economic numbers continue to suggest economic recovery. Seriously, I cannot believe anyone still has any doubts about that.

Even though many investors were elated to see the rise today, it really did nothing to change the short term neutral trend and short term bearish momentum in the market. Monday's high continue to hold up strongly and there are still no signs of a breakout. Volume remains low, momentum remains short term bearish and it seems like a visit down to the 9000 points level still seem inevitable this week.

For now, the Dow is in short term neutral trend, intermediate term bull trend and primary bull trend.

Tuesday, August 18, 2009

Dow Gains Despite Lousy Numbers

Even though economic numbers turned in worse than expected today, the Dow still gained 82 points due to technical rebound from yesterday's ditch.

Yes, a small pullback or a few sideways days usually follows every big up or down day. There is nothing economic behind such moves. Its just normal profit taking or stop loss in play after big moves. In fact, today's gain can only be classified as a sideways day in the context of yesterday's 186 points ditch. Bearish momentum continues to grow as trading volume continues to shrink. The 30 days moving average at about 9000 points continue to be the short term support target.

Investors will be waiting for forward looking data in this Thursday's Leading Indicators and Philley Fed (see Stock Market Calendar). However, with options expiration Friday coming up, I doubt there will be any committed buying. This also falls into the pullback/sideways to 9000 points scenario that I have painted over the last few days.

For now, the Dow is in short term neutral trend, intermediate term bull trend and primary bull trend.

Monday, August 17, 2009

Dow Pullback Despite Great Empire State Index

The Dow made its biggest single day retreat since this rally begun, closing down 186 points despite encouraging Empire State Index.

Yes, this it technical pullback at its best. A big pullback despite an economic number surprise that should encourage a breakout. Yes, short term technical movements cannot be simply explained by economic numbers especially in overbought or oversold conditions. This is definitely the technical pullback that I have been talking about for days. The good news is, the short term support marked by its 30 days moving average is slowly catching up as well, setting the short term bottom at about 9000 points. The 30 days moving average has been a strong short term support for the Dow in terms of intermediate trend and as long as this line holds, this rally has more to go. Investors are also reallocating into the high bond yields this month bring bond yields steadily lower all month long (see Bond Yields). With bond yields again at reasonable levels and 30 days moving average line drawing nearer, it does seem like it is going to hold up afterall with the eventual reallocation back into stocks.

For now, the Dow is in short term neutral trend, intermediate term bull trend and primary bull trend.

Wednesday, August 12, 2009

Pullback Stalls...

The Feds did exactly what was expected of them today, keeping rates steady and probably for an "extended period" of time (see Stock Market Calendar). Investors welcomed the news obviously as the Dow closed up by 120 points, erasing all of yesterday's losses. This economic recovery is underway without doubt as all the economic data has pointed to so far. In fact, more and more funds are rebuilding their portfolios right now, providing the strength that we have seen so far. The strength displayed so far convinced me that this expected pullback may end up as a short term neutral trend again, for the 30 MA to catch up before resuming the bullishness. The Dow is right now at the edge of calling a short term neutral trend if this week continues sideways without a significant breakout. There are no reversals in my short term indicators from bearish to bullish yet which makes a breakout rather distant. For now, the Dow remains in all out bull trend and is definitely the time to continue to invest in the long term through stocks and hedge downside risks using Married Puts.

Wednesday, August 05, 2009

Investors Look Past Job Data

Investors look past an extremely optimistic ADP employment report today as the Dow moves sideways, losing 39 points.

The sense that the market is short term overbought and that much of these great numbers have already been priced in so far is getting overwhelming. Indeed, the Dow is way overdue a pull back to the 8750 level marked by its 50 days moving average before it can move higher healthily. The longer the wait, the stronger the pullback. The bulls are keeping it high so far, anticipating a surprise on the Job report this Friday (See stock market calendar). Consensus is looking for a higher unemployment rate of 9.7% while investors are speculating on it being unchanged as a sign of the bottom. The Dow continues to be in an all out bull trend but at a level which I would not personally be in newly long.

Monday, August 03, 2009

ISM Index Soars!

ISM index beat expectations by a mile today, turning in a surprising number of 48.9 from a consensus of 46.5. Investors bought into the good news pushing the Dow up another 115 points.

The ISM index or Institute of Supply Management Manufacturing Index is the first piece of heavyweight economic number out every month and it surveys purchasing managers in the manufacturing sector on their sentiments and outlook. This survey is so important because it has historically shown to lead real GDP. In fact, a reading of 50 is believed to be consistent with a real GDP growth of about 2.5%. As such, it does seem from the number that the US economy would be back in the green in the near future.

Yes, technical analysts like myself continue to be baffled by the sustained strength in the market at critically overbought resistance levels. Indeed, as the old saying goes, the market can stay irrationale longer than you can stay solvent. Even though the move was strong today, volume continues to be average and short term bullish momentum continues to fade. In fact, the S&P500 is aboe 1000 points again for the first time since Oct2008 and that has to be a strong resistance zone as well. As such, I continue to anticipate a technical pullback in the market this week no matter how the rest of the numbers turn out.

Sunday, August 02, 2009

Heavy Weight Week Ahead...

The first full week of every month are heavy weight weeks full of important economic numbers. For this week, we have the ISM index on Monday and the Jobs Report on Friday (see stock market calendar).

Investors are obviously looking ahead to better numbers again this time round. Consensus for ISM index is for a higher number of 46.5 and consensus for unemployment rate is for yet another higher number of 9.7%. Will beating these consensus result in a breakout? The technicals seem to suggest otherwise. Short term bullish momentum has been reducing steadily over the past week suggesting that the bulls may be slowing down and yielding to the bears. This continues to show that much of these good news has been priced in through the July rally so far. As such, a technical pullback seems inevitable this week as the Dow look set to test its 50days moving average in order to establish it as the long term support that it has always been for long term trends. For now, the Dow remains in all out bull trend.