The economic focus this week is on the June employment report.
Trends
S&P 500 stocks remain in the Break Down/Further Distribution phase. The ratio of S&P 500 stocks in an uptrend to a downtrend (i.e. the up/down ratio) continued a downward trend started nine weeks ago.
Economic report Report Release Date Consensus Previous
ISM Index June July 2nd 55.5 55.0
10:00 AM
Factory Orders May July 3rd 0.0% 0.3%
10:00 AM
ISM Services June July 5th 59.0 59.7
10:00 AM
Non-farm Payrolls June July 6th 130,000 157,000
8:30 AM
Jobless Rate June July 6th 4.5% 4.5%
8:30 AM
Hourly Earnings June July 6th 0.3% 0.3%
8:30 AM
Source: www.marketwatch.com
Earnings reports by well known companies are virtually non-existent this week.
Trends
S&P 500 stocks remain in the Break Down/Further Distribution phase. The ratio of S&P 500 stocks in an uptrend to a downtrend (i.e. the up/down ratio) continued a downward trend started nine weeks ago. Last week the ratio fell from 1.82 to (261/168=) 1.55. Sixteen S&P 500 stocks broke resistance last week (including six stocks on Friday: Goodrich, International Flavours, Fluor, Huntington Bancshares, Commerce Bancorp and Ace) and 43 stocks broke support (including seven stocks on Friday: Pactiv, Solectron, Novellus, Hilton, Walgreen, Regions Financial and Morgan Stanley).
Bullish Percent Index for S&P 500 stocks fell significantly last week. It continues to weaken below its 15 day moving average. It remains overbought and in an intermediate downtrend.
Chart courtesy of StockCharts.com www.stockcharts.com
TSX stocks also remain in the Break Down/Continued Distribution phase. The up/down ratio for TSX stocks fell from 1.51 to (92/80=) 1.15. Six TSX stocks broke resistance last week (including Cogeco and CHC Helicopters on Friday) and 25 stocks broke support (including five stocks on Friday: Thompson Creek, Russell Metals, Fortis, National Bank and IGM Financial).
Bullish Percent Index for TSX stocks also deteriorated significantly last week. The Index continues to trend lower from an intermediate overbought level and remains below its 15 day moving average.
Chart courtesy of StockCharts.com www.stockcharts.com
Technicals for the S&P 500 Index deteriorated slightly last week. Although the Index gained 0.1% last week, it also briefly broke short term support at 1,487. In addition, RSI, MACD and Stochastics continued to trend lower. Indeed, Stochastics, the fastest of the three short term momentum indicators already is oversold. The Index briefly moved above its 50 day moving average early last week but failed to sustain that level. Resistance at its all time high set early in June at 1540.56 is well established. Next downside technical target is to its 200 day moving average at 1429.60.
Chart courtesy of StockCharts.com www.stockcharts.com
Percent of S&P 500 stocks trading above their 50 day moving average dropped slightly last week. Intermediate trend remains downward.
Chart courtesy of StockCharts.com www.stockcharts.com
Percent of S&P 500 stocks trading above their 200 day moving average also eased slightly last week. Intermediate trend remains down.
Chart courtesy of StockCharts.com www.stockcharts.com
Technicals for the Dow Jones Industrial Average were virtually unchanged last week. The Average gained 0.4% last week. It remains in a tight four week trading range with resistance at its all time high at 13,692 and support at 13,260. RSI and MACD continue to trend lower from overbought levels. Stochastics fell to a short term oversold level. The Average is flirting with its 50 day moving average at 13,384. Downside risk on a break below its 50 day moving average and support at 13,260 is to its 200 day moving average at 12,553.
Chart courtesy of StockCharts.com www.stockcharts.com
Bullish Percent Index for Dow Jones Industrial Average stocks finally fell below 96.67% and its 15 day moving average. Its intermediate trend now is down.
Chart courtesy of StockCharts.com www.stockcharts.com
Technicals for the NASDAQ Composite Index were virtually unchanged last week. The Index gained 0.6%. Once again, it bounced nicely from its 15 day moving average. MACD and RSI were virtually unchanged, but remain in short term downtrends. Stochastics are neutral.
Bullish Percent Index for NASDAQ Composite stocks continues to deteriorate. The Index is trending downward from an intermediate overbought level and remains below its 15 day moving average.
Chart courtesy of StockCharts.com www.stockcharts.com
Chart courtesy of StockCharts.com www.stockcharts.com
Technicals for the TSX Composite Index were mixed last week. The Index slipped 0.6% last week. The Index established intermediate resistance on May 23rd at its all time inter-day high of 14,216.21. Short term support at 13,701 was broken briefly. However strength on Friday in Research in Motion and the energy and gold sectors boosted the Index once again to above its 50 day moving average. RSI was virtually unchanged. MACD continues to move lower. Both remain in short term downtrends. Stochastics already have declined to a short term oversold level. Strength relative to the S&P 500 Index remains upward despite divergence recorded last week.
Chart courtesy of StockCharts.com www.stockcharts.com
Percent of TSE Composite stocks trading above their 50 day moving average fell significantly again last week. Data remains in an intermediate downtrend.
Chart courtesy of StockCharts.com www.stockcharts.com
Percent of TSX stocks trading above their 200 day moving average also fell significantly last week. Intermediate trend remains down.
Chart courtesy of StockCharts.com www.stockcharts.com
Technicals for the Australia All Ordinaries were virtually unchanged again last week. The Index remains in a tight four week trading range between its all time high at 6,436 and short term support at 6,200. The Index is flirting with its 50 day moving average at 6,300. RSI was virtually unchanged. MACD and Stochastics continue to trend lower from a short term overbought level. Strength relative to the S&P 500 remains neutral.
Chart courtesy of StockCharts.com www.stockcharts.com
Technicals for international equity indices were mixed again last week. The Nikkei Index slipped 0.3%, the FTSE Index added 0.6% and the CAC Index improved 0.5%. All remain below multi-year highs set earlier this year.
All charts courtesy of StockCharts.com
The Canadian Dollar recorded surprising strength last week. It briefly touched a 30 year high on Friday thanks mainly to stronger commodity prices and weakness in the U.S. Dollar. However, early strength on Friday was lost on news that Canada’s real GDP growth slowed to 0% in April. Short term momentum data remains overbought and continues to weaken.
Chart courtesy of StockCharts.com www.stockcharts.com
Small gains by U.S. equity indices combined with a stronger Canadian Dollar spelled additional losses in value for U.S. equity securities in Canadian Dollar terms. Since February 7th the Dow Jones Industrial Average has declined 5.6 % in Canadian Dollars, the S&P 500 Index is down 7.3 % and the NASDAQ Composite Index has given up 6.6%.
All charts courtesy of StockCharts.com
Weakness in the U.S. Dollar late last week was notable. Intermediate trend remains down. MACD and RSI have rolled over from short term overbought levels and are trending lower. Support at 81.25 likely will be tested shortly.
Charts courtesy of StockCharts.com www.stockcharts.com
The Euro is a mirror-image of the U.S. Dollar. Resistance at 136.79 is to be tested.
Weakness in the U.S. Dollar is having a positive impact on commodities priced in U.S. Dollars. The CRB Index resumed its intermediate uptrend last week.
Chart courtesy of StockCharts.com www.stockcharts.com
Technicals on gold remain mildly encouraging. Gold bounced nicely from its 200 day moving average at $643.52 U.S. last week thanks partially to weakness in the U.S. Dollar. Resistance is at $698.00 U.S. Intermediate trend remains up. MACD, RSI and Stochastics are oversold and trying to recover.
Chart courtesy of StockCharts.com www.stockcharts.com
Gold stocks continue to outperform the price of gold, an encouraging technical sign. The AMEX Gold Bug Index bounced nicely from support at 317.70 late last week and maintains an intermediate uptrend. Technical action is typical of a sector developing a base building pattern prior to a period of seasonal strength.
Chart courtesy of StockCharts.com www.stockcharts.com
Copper recorded modest gains last week thanks partially to weakness in the U.S. Dollar
Chart courtesy of StockCharts.com www.stockcharts.com
Crude oil prices strengthened again last week and remain in an intermediate uptrend. They closed above the psychological important $70 U.S. per barrel level on Friday to reach a 10 month high. Short term momentum data is overbought, but continues to trend higher.
Chart courtesy of StockCharts.com www.stockcharts.com
U.S. long term interest rates continued to move lower last week. A decline to their break out level and 50 day moving average near 4.90% is possible in the short term. Short term momentum data has rolled over from an overbought level and continues to weaken.
Chart courtesy of StockCharts.com www.stockcharts.com
Other factors
Trading activity is expected to slow due to holidays this week. Canada celebrates Canada Day today. The U.S. celebrates Independence Day on Wednesday. With the U.S. holiday occurring in the middle of the week, many traders have taken most of the week on holidays.
Equity markets are in the “honey moon” period prior to release of second quarter reports. According to Brooke Thrakray’s book entitled, “Thackray’s 2007 Investor’s Calendar, U.S. equity markets have a seasonal period of strength from two market days prior to the end of June (i.e. Thursday and Friday last week) to five market days after Independence Day (i.e. to July 11th this year). The trade has been profitable 74% of the time since 1950 with an average gain per period of 1.0%.
Second quarter results may prove to be difficult for equity markets on both sides of the border. Results in the U.S. will be helped by strength from international operations and from currency translations. However, impact of currencies will be less than results reported in the first quarter. Results will be negatively impacted by higher energy, interest and labour costs as well as greater loan loss provisions by the financial services industry. In Canada, second quarter earnings will be negatively impacted by an 8.7% increase in the Canadian Dollar relative to the U.S. Dollar. Most impacted are Canadian companies that produce goods in Canadian Dollars and sell them for U.S. Dollars (e.g. natural resource companies). In addition, Canadian companies reporting in Canadian Dollars with U.S. operations (e.g. financial institutions) will consolidate U.S. earnings using a much lower exchange rate.
Takeover fever appears to be abating. Summer malaise or fear of greater regulation and taxation of hedge funds by Congress? Time will tell.
The “Fear Index” continues to spike. Volatility in equity markets is escalating.
Chart courtesy of StockCharts.com www.stockcharts.com
Federal Reserve action last Thursday confirmed its ambivalence to act. Greatest response to the report came on Friday when the U.S. Dollar fell sharply. Look for follow through this week and subsequent strength in commodities priced in U.S. Dollars. Gold and gold stocks continue to show early signs of bottoming.
‘Tis the season for earnings warnings prior to quarterly earnings reports! The frequency of earnings warnings last week was remarkably low.
The sub-prime mortgage issue continues to raise its ugly head. The issue is expected to resurface this week when additional funds holding sub-prime mortgages are expected to announce revaluations. Rates on sub-prime mortgages have gone parabolic during the past month. Monthly revaluations could be brutal and could lead to similar “concern” raised by Bear Stearns’ investors during the past two weeks.
The Bottom Line
The calm before the storm! Trading activity is expected to be relatively quiet this week prior to the earnings report season. Upside potential remains limited. Downside risk remains significant. ‘Tis the season to preserve capital!
Bullish Percent Indices for Canadian Sectors
Deterioration in the Materials sector was significant last week. Weakness in the Materials sector was the main reason for weakness in the Bullish Percent Index for TSX 60 stocks. Material stocks are starting to anticipate “difficult” second quarter earnings reports mainly due to strength in the Canadian Dollar.
Bullish Percent Index
Sector June 15 June 22 June 29
Energy 70.8 70.8 70.8
Gold 40.0 40.0 36.7
Materials 64.5 64.5 51.6
Financials 71.4 64.3 64.3
TSX 60 75.0 75.0 66.7
More on the Biotech Sector
Technically, the sector has started to show early signs of trying to bottom for a seasonal trade. Key stocks (e.g. Amgen, Genentech) as well as most ETFs in the sector have set short term lows. The AMEX Biotech Index recently bounced nicely from its 200 day moving average. Short term momentum data shows that the sector is heavily oversold and trying to bottom, typically of charts that have entered the base building phase. However, evidence of the start of an intermediate uptrend is lacking. Stay tuned for an optimal technical entry point into the sector.
The analyst at Needham & Co. recently released an interesting report noting that partnerships in the biotech sector with major pharmaceutical companies are occurring at a record pace. According to Needham, “We expect this trend to continue, as big pharma and established biotechs seek to add new technology platforms and supplement their clinical pipelines”. The analysts identified numerous drug candidates in the development stage that are believed to be candidates for partnerships. News on partnerships should help the biotech sector in the second half of 2007.
Chart courtesy of StockCharts.com www.stockcharts.com
Correction
Thank you to a subscriber to Tech Talk who pointed out that the DAX 30 Index is a performance index that includes dividend income. Tech Talk incorrectly noted in a seasonality report on the DAX Index released last Thursday that data did not include dividend income.
Disclosure: Mr. Vialoux does not own securities mentioned in this report.
July,02,2007
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