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Summary
The performance of the stock market last week conformed closely to some of the key views expressed in last's weekend's edition. In a word and for the overall period, the market was -- "lousy!"
The coming week contains a meeting of the Federal Open Market Committee, and it is no secret that micro manipulating the stock market is one of Alan Greenspan's true passions. So there's a great chance the FOMC will try to throw a flagging market a bone in the FOMC's post-meeting statement on Thursday. I wonder, though, if the situation Greenspan and his Fed colleagues have created couldn't become a Humpty Dumpty at some point? Where the cumulative effects of all the machinations of the past finally come home to roost and actually contribute to a blow-up in the stock market? In other words, an ironic display of the law of unintended consequences at its best.
That's a story for another day. In the meantime, it looks to me like the stock market has already rolled over or is in the immediate process of doing so, and doing so in a serious way. Therefore, while it is unlikely to be a straight-line move to the downside, particularly with a Fed meeting and quarter-end at hand, I suspect the current decline is far from over.
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Stocks
To set the possibilities for this week and beyond), a quick look at some of the views I expressed last week at this time:
"The market is highly short-term overbought, with an unhealthy divergence or two starting to manifest themselves. If you were a betting person, a lower market this coming week does not appear the worst bet in the world. The current period looks a good deal like early March, when stocks hit a momentum peak, then experienced a solid sell-off into the April lows."
* Overall, the equity market put in something at least bordering on a miserable week. The GRA seven-measure tracking group was down an average 2.3% (median decline of 2.1%).
* All seven components fell during the period. Losses ran in a range of 3.1% for the DJIA, to 1.9% for the NYSE Composite and the Wilshire 5000.
* For the year to date through last Friday, the tracking group was down 3.1%, on average, registering a median decline of a similar 3.3%. Going into last week, three of the group's seven components were in the black for 2005 (NYSE Composite, S&P 500, Wilshire 5000). This is not the way they exited the week, however.
The following table breaks out tracking group price-only returns for last week, from the March 2005 highs, and for this year through 6/24.
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SELECTED STOCK-MARKET MEASURES
(GRA Seven-Measure "Tracking
Group," Listed by YTD Returns)
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06/24 2005 12/31 Week From
2005 High 2004 Ended 2005
Close Close* Close 06/24 High YTD
===== ===== ===== ===== ==== =====
NYSE Comp. 7209 7441 7250 -1.9% -3.1% -0.6%
Wilsh. 5000 11844 12074 11971 -1.9% -1.9% -1.1%
S&P 500 1192 1225 1212 -2.1% -2.7% -1.7%
Russ. 2000 630 645 652 -2.1% -2.3% -3.3%
Value Line 391 403 404 -2.3% -3.0% -3.3%
DJIA 10298 10941 10783 -3.1% -5.9% -4.5%
NASDAQ 100 1500 1545 1621 -2.5% -2.9% -7.5%
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Average -2,3% -3.1% -3.1%
Median -2.1% -2.9% -3.3%
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*2005 closing highs as of March, as of dates shown:
NYSE Composite (3/4), Wilshire 5000 (3/7), S&P 500
(3/7), Value Line (3/7), Russell 2000 (3/4), DJIA
(3/4), NASDAQ 100 (3/7).
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Also appearing in last week's missive:
"I'm still deeply entrenched in the secular-bear camp. However, based on market behavior and chart patterns of the last several months, there is no question the next serious, protracted down-leg, when it occurs, will emerge from a well-defined broadening-top formation."
Re-reading this now makes me wish I had added a sentence to it, although the idea is something of which longer-term are totally aware. The sentence I would have added would have gone something like, "The stock market currently possess a well-defined broadening-top formation. Therefore, a major distribution formation already is in place."
I believe it is important to reaffirm the "secular-bear" opinion with frequency, since the consensus wisdom at present is that the market is now engaged in what will turn out to be more than a cyclical bull within a secular bear. One response I have to this, however, is when will it turn out to be this?
Major bellwether proxies are without new highs now for well more than five years. As of Friday, the DJIA, the S&P 500 and the NASDAQ stood 12.2%, 22.0% and 68.1%, respectively, below their record highs of 2000. This means that advances of 13.8%, 28.1% and a stunning 213.6% are required to get back to where these measures stood -- five years ago! When does the "five years ago" begin to sink in, I wonder?
* Although last week put a dent in the level of the market's overbought condition, stocks remains short-term overbought.
* As the table below indicates, the strong on-balance advance of past weeks had brought the cumulative NYSE advance-decline result to a level above where it stood at its prior peak, which was the week ended 3/4. But cumulative NYSE up-down volume still remained below its March highs. In my view, this divergence set up a good possibility of a market fail at around levels prevailing going into last week.
It is too early to tell for sure, of course, but last week's downturn, considering the general levels from which it commenced, was not a bullish portent. Note also in the table below the material reversal in new high momentum, as well as the loss in momentum in average closing tick.
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SELECTED NYSE BREADTH MEASURES --
WEEKLY & CUMULATIVE DATA (10/29/04=0)
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Adv - Dec UVol - DVol 52W H - L Closing Tick
Week ----------- ----------- ----------- ------------
Ended Week Cum. Week Cum. Week Cum. Week Cum.
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2005
06/24 -2259 24871 -1.12 5.78 632 21807 295 15119
06/17 4086 27130 2.38 6.90 1059 21175 732 14824
06/10 1196 23044 0.52 4.52 633 20116 371 14092
06/03* 1900 21848 0.28 4.00 627 19483 398 13721
05/27 2267 19948 1.06 3.72 333 18856 296 13323
05/20 4613 17681 2.79 2.66 201 18523 601 13027
05/13 -2141 13068 -1.69 -0.13 17 18322 629 12426
05/06 2746 15209 1.55 1.56 184 18305 791 11797
04/29 305 12463 -0.40 0.01 -324 18121 506 11006
04/22 1461 12158 0.54 0.41 -386 18445 399 10500
04/15 -4417 10697 -3.36 -0.13 -315 18831 117 10101
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03/04 1989 23753 0.61 8.36 1228 18424 745 8137
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*Four-day trading week.
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* Mentioned earlier were emerging "divergences." One that popped up the week before last involved up-down issue and up-down volume ratios, something I call an "inversion." It is a very short-term indicator in nature, but these periodic inversions are frequently followed shortly thereafter by a market decline. Historically speaking, last week fit the pattern of these occurrences very well. And for what it may be worth, the market experienced another of these divergences last week, although it was not of lesser magnitude of the one preceding it.
* Something else that has been supporting the notion of an overbought market are some of the key sentiment measures. Ones relating to the VIX and put-call activity are shown in the following table.
The week before last, the VIX hit a multi-, multi-year low (10.78 on 6/17). But even in the face of last week's sell-off, the VIX traded as low as 10.81 during the week (on 6/22), and it was up only nominal amount for the week overall. Some of the other CBOE put-call numbers last week also were out of sync with a market down as much as last week's market was. Thus, I conclude last week's sell-off was not taken too seriously by many market participants.
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THE BEHAVIOR OF CBOE SENTIMENT-RELATED MEASURES
AND THE S&P 500 FROM 10/29/04 THROUGH 06/24/05
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CBOE Options S&P 500
Date --------------- -------------------
or Put/Call Ratios Vs. 10/29/04
Week CBOE -------------------- Prior 1130.2 =
Ended VIX* All Equ. Ind. Tot.@ Close Week 100.00
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2005
06/24 12.18 0.89 0.57 1.50 0.89 1191.6 -2.1% 105.43
06/17 11.48 1.02 0.53 1.93 0.91 1217.0 1.6% 107.68
06/10 11.96 0.71 0.47 1.55 0.90 1198.1 0.2% 106.01
06/03 12.15 0.99 0.61 1.90 0.90 1196.0 -0.2% 105.82
05/27 12.15 0.81 0.57 1.61 0.90 1198.8 0.8% 106.07
05/20 13.14 0.93 0.46 2.23 0.89 1189.3 3.1% 105.23
05/13 16.32 1.02 0.72 1.58 0.88 1154.1 -1.5% 102.12
05/06 14.05 1.07 0.80 1.67 0.88 1171.4 1.3% 103.65
04/29 15.31 1.01 0.74 1.65 0.88 1156.9 0.4% 102.36
04/22 15.38 0.98 0.67 1.90 0.88 1152.1 0.8% 101.94
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04/20l 16.92 0.98 0.63 1.87 0.88 1137.5 -- 100.65
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04/15 17.74 1.42 1.00 2.17 0.86 1142.6 -3.3% 101.10
=====================================================
03/07h 12.26 0.77 0.57 1.38 0.86 1225.3 -- 108.41
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03/04 11.94 0.81 0.61 1.31 0.86 1222.1 0.9% 108.13
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VIX Highs and Lows (Including Intraday)
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Year High Date Low Date
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2005 18.59 04/18 10.78 06/17
2004* 22.67 03/22 11.14 12/23
2003 41.16 03/12 14.83 12/15
2002 56.74 07/24 18.87 03/28
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*New series, all of 2004 forward. @All
products. l-Lowest S&P close during 2005.
h-Highest S&P lose during entire period.
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* The following table updates key moving average relationships, using the DJIA, the S&P 500 and the NASDAQ Composite as proxies. As a hunch, I would think the near-term leg of the decline beginning last week will not have the market set up for much of an oversold bounce until the NASDAQ Composite and the S&P 500 at least go down and tag their 200-day averages.
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DJIA, NASDAQ COMPOSITE AND S&P 500 CLOSING PRICES ON
SELECTED DATES VERSUS RESPECTIVE 20-DAY, 50-DAY AND
200-DAY MOVING AVERAGES (Percent or Portion Thereof)
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DJIA Vs. NAZ Comp. Vs. S&P 500 Vs.
--------------- --------------- ---------------
Date 20D 50D 200D 20D 50D 200D 20D 50D 200D
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2005
06/24 -2.1 -0.8 -1.4 -1.2 1.8 1.0 -0.9 0.8 1.4
06/17 1.0 2.5 1.2 0.9 4.3 3.3 1.5 3.3 3.8
06/10 0.4 1.5 0.7 0.2 3.3 2.0 0.4 1.9 2.3
06/03 0.5 1.0 0.4 2.1 4.1 2.9 1.0 2.0 2.6
05/27 1.6 1.8 1.2 3.7 4.7 3.2 1.8 2.3 2.7
05/20 1.8 1.0 0.6 4.0 3.4 2.0 1.9 1.5 2.1
05/13 -0.7 -2.7 -2.5 1.6 -0.3 -1.1 -0.5 -1.8 -0.6
05/06 1.1 -1.3 -0.3 1.2 -1.3 -1.3 0.9 -0.8 1.2
04/29 -0.8 -3.1 -1.7 -1.7 -4.0 -3.4 -0.6 -2.2 0.2
04/22 -1.9 -4.0 -2.1 -2.0 -4.2 -3.0 -1.5 -2.9 -0.3
04/15 -3.5 -5.2 -2.8 -4.1 -6.1 -4.2 -2.8 -4.2 -1.0
==========================================================
03/04 1.6 2.6 5.7 0.3 -0.4 4.1 1.5 2.3 6.6
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Interest Rates
After last week's yield declines, the coming week represents a moment of truth of sorts with regard to the intraday lows set on 5/27, particularly with the two-day FOMC meeting during the period.
* Treasury yields fell sharply across the coupon-issue curve last week, with declines pretty much uniform. There was a 12 basis-point drop in the two-year note yield, while the yield on the 30-year bond fell 15 basis points.
* Last week saw continued speculation about the Fed's future course with regard to additional increases in the Federal Funds Rate. Some interest-rate, bond-market luminaries opined that the Fed would move two more times this year -- 50 basis points total -- and that would end the hike in rates.
* To some degree, the 50 basis-point thesis found its way into the fed funds futures market, with the December contract ending the week at a yield of 3.70%, down five basis points for the week. The futures market was unequivocal about the quarter-point funds-rate hike (to 3.25%) that is virtually certain for this week. And the futures run prices in another quarter point increase with high certainty, probably coming at the FOMC's August meeting (on 8/9). So the FOMC's post-meeting statement this week will be interesting (which of these are not?) with regard to the possible changed expectations it generates for the balance of 2005.
The Dollar
* The Dollar Index rose 1.1% last week, getting back just about exactly what it lost the prior week. The Dollar Index is nearing a major overhang area, in my opinion. Nevertheless, recent strength is not be a good development for currency translations on a quarter-over-prior-quarter basis for many companies for the June quarter.
Commodities/Gold
* The CRB Futures Index rose 0.4%, helped by more gains from the energy complex.
* Crude Oil was up another 1.1% last week (new highs during the period), and the active unleaded gasoline contract rose almost 1%. Home heating oil was up, too, although it rose a modest 0.1%.b
I suspect there is something going on fundamentally in crude that is not being picked up on the charts, explaining why the significant correction that has been widely forecast has not occurred. Therefore, with a lot of continued volatility, I think crude can work its way perhaps a good deal higher than the consensus currently believe, before a genuine, protracted correction of any import takes place. If so, it this another not-so-good portent for the stock market.
* Physical gold had another decent week, rising about 0.5% (spot price). During the period, prices hit their highest level since March. Silver was down 0.7%.
From last week's edition:
"The combined behavior of the physical metal and the stocks of the major companies in the sector [in the XAU] suggest that something rather major may be developing."
I continue to believe this is a very strong possibility!
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