Charts Don’t Lie and They Say the Rally is Over

Volatility remained high yesterday following more hints that the Fed may decide not to apply as much stimulus as first anticipated. An article in the WSJ on Wednesday said the Fed was likely to spend a few hundred billion dollars which is much lower than the $2 trillion advocated by some economists. Apparently many must have missed the first hint of future Fed restraint that we noticed last weekend and reported in Monday’s Daily Market Outlook, saying, “The bond market fell on Thursday following a comment by Federal Reserve Bank of St. Louis President Bullard that he sees “small increments” of Treasury-bond purchases when the Fed meets in early November.” The Fed’s governors will meet next week for two days and will probably make a policy announcement following the meeting. For the second day in a row it was strength in the dollar and the QE2 policy that dominated the stock market despite excellent earnings from key companies.  Whirlpool (NYSE: WHR ), ConocoPhillips (NYSE: COP ), Procter & Gamble (NYSE: PG ) and Aflac (NYSE: AFL ) all produced positive earnings surprises but it had little impact on the shares of  their stock. But one sector, semiconductors, actually rose as a result of better-than-expected earnings: Broadcom (NASDAQ: BRCM ) hit a new 52-week high and helped drive the Philly Semiconductor Index up 3.1%. Of the sectors that showed losses, materials was hardest hit, off 0.9%. Industrials were off 0.7% and energy fell 0.6%. New home sales for September increased by 6.6% month-over-month. And Durable Goods orders for September rose 3.3% versus. an expected increase of 1.8%. But neither report had much impact on trading. Treasurys were lower with the 10-year note’s yield climbing to a one-month high of 2.72%. The dollar rose against the euro, and in late afternoon trading the euro was at $1.3768, down from $1.3852 on Tuesday. At the close the Dow Jones Industrial Average was off 43 points to 11,126, the S&P 500 fell 3 points to 1,182 and Nasdaq rose 6, closing at 2,503. Volume on the NYSE came in at just over 1 billion shares with decliners over advancers by more than 2-to-1. Nasdaq traded 554 million shares and decliners there were ahead by 1.6-to-1. Crude Oil for December delivery fell 61 cents to $81.94 a barrel. The Amex Energy SPDR (NYSE: XLE) fell 25 cents to $59.33. December Gold fell $16 to $1,322.60 an ounce, and the PHLX Gold/Silver Index (XAU) lost $3.88, closing at $196.53. Most futures were negatively impacted by the strength in the dollar and lower expectations for Fed monetary stimulus. What The Markets Are Saying Following the high-momentum run from the August lows, the indices are now stalled at major resistance zones represented by S&P 500 1,174 to 1,210 and DJIA 11,000 to 11,200. However, despite the obvious selling that has caused volatility readings to leap to pre-October levels, none of the major indices has yet broken from its immediate support. There is, however, at least one chart that may hint that a break is about to occur, and it is the chart of the broad-based NYSE Composite Index. When looking for a possible clue to the market’s next move, I always go to this index because it contains such a diverse number of sectors. Yesterday the index closed on its 20-day moving average line, but its intraday low broke below the line by a significant margin. And its internal indicators (stochastic, MACD and momentum) flashed clear sell signals. No other index has yet to provide such a clear warning. This is admittedly flimsy evidence upon which to conclude that a turn is about to occur. But it is enough, along with the overbought internal indicators in the other indices and the market’s failure to move ahead on some very strong earnings numbers, to refrain from taking long-term positions until all of this shakes out. And, I think it is enough evidence for traders to dabble a bit in contra ETFs and other bearish trading strategies. The market has thus far been supported by the view that the dollar would remain weak and the Fed would be flooding the markets with trillions of new dollars. But yesterday’s WSJ article seems to confirm that the Fed governors are considering implementing a far less aggressive plan for QE2 than first proposed. And here is a tip for the future — always take any comments from the St. Louis Fed seriously since it has become common practice for the Fed Chairman to first “float an idea” to the public from that source. For the bulls the clouds are gathering — now is the time to take shelter from a mild storm before the rain and lightning strike. Today’s Trading Landscape For earnings to be reported today, click here . Economic reports due: Jobless Claims (the consensus expects 455 K), EIA Natural Gas Report, Fed Balance Sheet, and Money Supply. If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net .
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