Markets Take a Breather... Topped Out?

Just a quick peed at a short term chart of the Dow indicates that stocks have stalled over the last three sessions as earnings season winds down. What seems to be a psychological barrier exists at the 9100 level, but underpinning the pressure on traders is the non-confirmation in the Dow Jones Transportation Index (DJT) that was spoken of here last week.

Without confirmation of a breakout in the transports above the 3717 (January 6, 2009) level (currently 3523), there will be no talk of a new bull market, even though the possibility of one emerging still exists. Traders and analysts are becoming increasingly cautious about making market predictions, still reeling from the effects of last Autumn's tsunami of price declines.

There's also some confusion about just where stocks would have to go in order for a new bull to be proclaimed. Since the current bear is closing in on two years of age (October 2007), this bear may not have much further to proceed. At the very least, the rebound from March is encouraging to the bulls, as the incipient rally will soon reach 5 months. As bear market rallies go, that's a reasonable time frame. Naturally, continued gains would produce the much-desired "V bottom," though macro forces and experience tell us that a "W" is more likely, with the potential for either a truncated or extended third leg possible. For reference, take a look at a Dow chart of 2002-2003, where the Index bottomed just above 7500 at the end of September 2002, and rallied for a short time until hitting the next bottom around 7850 in March, 2003, just over 5 months later.

There were more zig-zags and I am oversimplifying, but the pattern is there for analysis, and could be re-emerging. Also notable is that the War in Iraq began with the beginning of the bull in March, 2003. There may be comparable political and military implications afoot, with increased troop presence in Afghanistan, though other conditions are not so closely aligned.

The issue is whether stocks on the Industrial and Transport indices have to reach January 2009 levels for confirmation or go back to November 2008 rebound highs. There's a big difference. On the Industrials, the November high was 9625; for the transports, a nip over 4000 is the sweet spot.

In any case, hedging for another down leg might be the prudent course at this point in time.

Dow 9,096.72, -11.79 (0.13%)
NASDAQ 1,975.51, +7.62 (0.39%)
S&P 500 979.62, -2.56 (0.26%)
NYSE Composite 6,328.67, -35.99 (0.57%)

The major indices spent almost the entire session in the red, with only the NASDAQ ending positive, a recurring theme. advancing issues held sway slightly over losers, 3163-3130. There were 165 new highs to just 71 new lows, lending credence to the bull ideology. Volume was moderately better than the past two sessions, another bullish signal.

NYSE Volume 1,280,160,000
NASDAQ Volume 2,236,427,000

If the stock market is taking a pause from screaming "recovery," commodities are singing a deflationary tune. September crude fell $1.15, to $67.23. Gold dropped $14.60, to $941.70. Silver lost 25 cents, to $13.74, though the precious metals are coming off two productive weeks of gains. Livestock and grain futures continued to experience price pressures.

There was little in the way of corporate earnings, though Office Depot (ODP) experienced a large second quarter loss. With businesses of every size cutting back, that's not much of a surprise. The stock lost nearly 20%, down 97 cents, to 4.38.

US Steel (X) reported a loss of $392 million, or $2.92 per share for the quarter ended June 30. Sagging demand for steel and steel products has pushed prices lower and crippled most producers. Fallout from the auto business is seen as a major factor affecting both prices and the profits of steel companies. The loss was the second straight quarterly for US Steel.

The S&P/Case-Shiller Home Price Index showed its first gain in nearly three years, though it could be more of a one-off than anything else. After dropping for 34 straight months, the 0.5% increase may amount to nothing more than a rounding error. With foreclosures still extremely high and unemployment showing few signs of abating, home prices may do a double-dip, just like stocks.