Firm's S&P morning note

The S&P 500 bounced from aggressively from the lower support area we highlighted in yesterday's S&P 500 note. We still believe the summer will be choppy and we could remain range bound for quite a bit of time. It is also possible we could see some semblance of a retest later this summer or as we approach the fall.That said yesterday's bounce had some vigor to it particularly on the NYSE where up volume beat down volume by a ratio of 10:1 and advancers bested decliners by a 4.5:1 margin.The NASDAQ was close to the task on the up to down volume camp with a 6.45 to 1 ratio, however it has less participation than the NYSE with only 2.7 stocks advancing for every one that declined. While these internals may suggest we can push a bit higher up into the range, we think given seasonal summer weakness the tape won't reward those with multi-month holding periods like it did from March to June, but will favor active trading.As long as the S&P 500 stays above Friday's lows the market still gets the benefit of the doubt.
Best.


posted by Peter Greene

S&P comments from the firm

As in the attached research note on the S&P 500, the index is sitting at the lower end of its support zone. Given the index is already qualified as oversold (ie. down 8% from its’ peak) it is even more important that it hold. If the rally off the bottom is still intact then an 8 % sell-off to support should be met with enthusiasm by buyers. If buying doesn’t materialize down here then that tells you a lot about the psychology of traders and then we would likely see the market continue to drift lower. It is really important for the bull argument that the market make some sort of stand here.

Given the summer months and many pm’s and traders hitting peak vacation time (July to August) we would expect trading volumes to taper off a bit making liquidity a bit of an issue.



posted by Peter Greene

Consumer credit at 3PM

So the next economic number that may put a wrench in the market is the Consumer Credit number released at 3pm Wednesday. Survey numbers say -8.5 Billion with prior month -15.7 Billion...Will this move us for the close, short answer is YES---market pros will use "any" excuse to trade the news....

Also big news today is Alcoa earnings-always big but for some reason everyone is jumping all over their earnings as a was to tell ALL future earnings for the quarter. Kind of dumb but true.

Below is a quick note from my firm on Consumer Credit:

Total consumer credit balances are shrinking at an aggressive pace. According to the Federal
Reserve, a majority of banks are still tightening their lending standards for consumer loans
and credit cards. Meanwhile, consumer spending is slipping again after an unexpected increase
earlier in the year.
Revolving credit balances are falling at a steadily increasing rate. Consumer spending has slipped in
recent months, although it is still holding up much better than it was in late 2008. Consumers also have
more cash to work with thanks to several months of greater savings, increased transfer payments from
the government, and payroll tax credits. These factors have lessened the need for credit cards, while
consumers also try to dig themselves out of debt.
Non-revolving credit balances are also shrinking, but the recent rate of decline has been slower and
steadier than it has for revolving credit. New vehicle sales remain extremely weak but seem to have
found a floor at an annualized sales rate of about 9 million units. Demand for new non-revolving lines of
credit is very weak, while current borrowers are steadily paying off their existing balances. Consumer
delinquency rates for auto loans remain much lower than they are for other types of credit.
Total consumer credit balances are expected to gradually decline over the months ahead. In particular,
revolving credit balances will fall steadily as consumers hold more cash and look to reduce their debt.
Consumers are not expected to significantly increase spending or their demand for credit until the labor
market begins to firm up in 2010 or beyond. On the upside, reducing credit utilization during this severe
recession will help consumers avoid a longer-term decline in credit quality.

posted by Peter Greene

S&P review from firm

As seen in the attached research report the S&P 500 Index recently slammed into a convergence of resistance and a downtrend line. After needing a near 44 % rally from the lows just to trade up to the aforementioned resistance area it was hard to imagine the S&P 500 would just blast up though that level. Add to the mix that we recently entered a period that is historically weak for stocks and it makes sense why prices have corrected of late. As we have said a few times recently in other S&P 500 updates the index has most likely set its high point for a while and was likely at best to trade range bound or realistically lower for a while. We also suggested and continue to suggest that stops on remaining long holdings be adjusted/tightened and long exposure be reduced for the time being.



Since the dawn of the markets most if not all bottoming processes have had some sort of testing process after
setting an initial low. In 2002 for instance (our most recent low prior to March of 2008) the S&P 500 tested the
lows on 3 separate occasions (red arrows) before the final lows were ultimately set. So to expect this time things
would be different doesn’t make much sense.


There will be short-term trading opportunities that present themselves during the remainder of the
summer and into the fall however we don’t see any directional bull trend re-establishing itself before
some sort of retest sequence. The only thing that would change this outlook is a high volume move on
strong internals back above the recent highs.



posted by Peter Greene

Firm's S&P levels

As seen in the attached research note the S&P 500 has been capped by resistance at the 950 level. As we had said in earlier S&P 500 notes we expect this level to mark a high water mark for a good period of time as we enter the seasonally weak period of the mid to latter summer. How deep of a correction we get will depend on the ability of the S&P 500 to hold support near the 875 level.

The best case scenario is we stay locked in a trading range between 950 and 875, while the more alarming scenario is we break back below the 875 region and we have a deeper sell-off as part of a retest of the lows.



posted by Peter Greene

ISM Chig. and 1 day S&P returns

This chart represents 1d S&P returns on release day for the ISM-Chicago figure. Returns are relatively normal during longer periods of expansion/contraction. But during periods of uncertainty, such as now, returns are volatile on the day of release and tougher to predict. Its sensitivity to Midwest auto manufacturing cycles is likely the current issue to decipher.

posted by Peter Greene

Firm's Oil comments

Crude Oil Weekly Report

Oil was a flat line as the market got pulled in different directions on a confusing mix of market fundamentals. Once again the Chinese are calling for a global currency so they can loosen their dependence on the dollar and talk of more big purchases of oil yet at the same time we have Bank of China Governor Zhou Xiaochuan playing down dollar worries by saying that China’s foreign exchange reserve policy is stable. That kind of talk may give the dollar a boost but the other key question for the oil market is whether or not the Chinese are going to continue their recent strong buying in oil.

Well the answer to that question is probably yes. Over the weekend it was reported that China plans to increase strategic crude oil reserves by 60 percent to 270 million barrels during the next five years by the Nikkei English News citing an unidentified official from China’s National Energy Administration. According to the report China will spend 30 billion yuan ($4.39 billion) for stockpiling facilities with a capacity to hold 169 million barrels. China Petrochemical Corp., China National Petroleum Corp. and other companies will construct and use the storage sites. If China continues to strengthen its reserve then oil will be bought on pullbacks. This should help provide some long term support.

Technicals: Because this is our initial piece on Oil, we decided to show a broader view of the USO (United States Oil Fund, LP) – our proxy ETF for the general crude contract. For the most part, the chart above represents a huge rounding type bottom. Notice the heavy volume at the trough – this is showing the type of volatile activity where money moves from weak hands to strong hands. This is most likely representative of oil bulls finally giving up after buying at much higher prices and new investors popping in feeling that oil was undervalued. Over short term, USO may linger but should eventually retest the $40 region and eclipse that to target the $55/$60 region over the more intermediate term.

posted by Peter Greene