But they are always buying…and selling. Asset managers get pummelled by consultants and large institutional clients if their aggregate cash levels get much above 5% (95% invested). If a manager gets crazy bearish and raises his/her cash level to above 10%, that manager is thought to be waaay out on a limb. In an increasingly competitive asset management environment where margins are being compressed seemingly by the day, the risk of lagging in a massive short-squeeze by having more cash than “the crowd” is simply too great to take on. No one wants to explain a 10% cash position (or greater) if the market has rallied; regardless of how much or how little that rally can be fundamentally justified.   

After an ugly August (the worst in twelve years for the Russell 2000 and the second worst in twelve years for the Dow 30, S&P 500 and NAZ 100), the first three days of September produced rallies of 4.36%-6.92%. 

At last Friday’s highs (three days into the month), the indexes had rallied more than any full September of the past twelve years.

Odds favor relative strength in the Naz 100 (six of the past eleven Septembers have been winners) and relative weakness in the Dow 30 (only four of the past eleven Septembers have been winners). S&P 500 and Russell 2000 have both produced five winning Septembers of the past eleven years.

With investors applauding a less-bad BLS Employment last Friday, expectations are again for extremely strong data to come. While fireworks related to the upcoming mid-term elections will likely keep the markets volatile enough for anyone’s taste, September’s history does not tell a happy story for market bulls.

**************************************************************

A recent pair of opinion articles really caught my eye.

On August 28, MarketWatch ran an opinion piece called, “The Death of Equities, Part 2?” which was an opinion on the opinion piece from the New York Times on August 27 in which the author reflected upon a 1979 Business Week cover story called (not-surprisingly), “The Death of Equities”. 

The NYT article, in a cursory fashion, discussed some of the fears investors were facing in 1979 such as: economic uncertainty, acute indecision in the market which showed itself through hyper-volatility, geo-political worries, and a seemingly non-stop exodus of money from the market. After reminding the reader that it was “only” three years until THE market bottom was established, the article ended with an ominous warning for anyone who has been selling as of late. “It would be a sad twist if people were to mirror their recent excessive risk-taking with excessive caution now”.  

The MarketWatch opinion piece had a fascinating comment as it basically said the same thing as the NYT piece in that a warning was issued for anyone who has been bearish or skeptical on the prospects of the next trend phase for the market. This piece ended with the following: “Is there a new bull-market ahead? Who knows? But articles like the front-page story in last Sunday’s Times (Aug 27 article) are one sign we may be much closer to the end of this long bear market than the beginning.” 

The Major Averages (Dow 30, S&P 400, 500, and 600, NASDAQ 100, and Russell 2000) are 55% to 81% above their respective bear market lows from 2008-2009. The S&P Financials is the only sector index to be officially in bear market territory (down 21.5% from its recent peak). Even still, the index is up 131% from its bear market low.

Comparing 2007’s peaks (all-time highs for three of the four Averages) to 2010’s recovery highs reveals some interesting technical data points. The recovery highs for the Dow 30 and S&P 500 were below bear market thresholds relative to 2007’s highs. The Naz 100 and Russell 2000 blasted right up through their bear market thresholds and came within 8% and 12.9%, respectively, of their 2007 highs before reversing lower. If the “long bear market” comment was in relation to 2007’s all-time highs, then I would agree…we are in a long bear market. But looking at the returns from 2008’s-2009’s lows, it seems that “the market” has priced in a superb recovery and on-going good economic and corporate news. 

Bear? Bull? It truly depends on your perspective. However, with the major averages down 20%-33% from 2007’s bull peaks but also up 55%-80% from their recent bear market lows, the broad market could be closer to an important top than it is to an exasperated market bottom.

************************************************************** 

Yesterday’s price action was a stark reminder of just how much good news is priced into the market at current levels. The sell-off can be (and has been) blamed on many culprits but the Fed’s darkened view of the so-called recovery dealt a severe punch in the gut to the bullish camp. Some of yesterday’s technical carnage includes:

The major averages (Dow 30, S&P 500, Naz 100, and Russell 2000) dropped back into negative territory for the year. 

The major averages all knifed back down below their 200 Day Moving Averages.

The Naz 100 and S&P 500 fell back below their 10% correction levels which are 1853 and 1098, respectively. That leaves only the Dow 30 (and two of nine S&P sectors) above their 10% correction levels.  

Portfolio managers, traders, strategists, analysts, and anyone else who lives in the markets each day have been trying to interpret the message and meaning of the extreme volatility we have seen since the increasingly infamous “flash crash” of May 6, 2010. The lightning speed at which “the market” changes its collective mind is not an indication of bullish market sentiment, in our estimation. Rather, it shows that investors are becoming more short-term oriented and are quite content to sell into strength. 

Today before the open, we got weaker-than-expected New Unemployment Claims but Continuing Claims were not as weak as expected. We also got July Import and Export Prices…both were weaker-than-expected. June Export Prices were revised from -0.2% to -0.7%. Add to that the -0.2% report for July (est. +0.1%) and the deflation argument becomes much more plausible.

Recent Consumer Spending data has not been as weak as estimated and there is likely to be at least some impact from back-to-school shopping so we could see some strength in Retail Sales. We would, again, strongly urge a sell into strength approach.

*************************************************************

Futures dropped immediately and the market was extremely weak for the first ninety minutes of the day. Then, investors remembered that every recent decline has quickly been bought. Further, the bullish thought process went, with a FOMC meeting next week, how likely is it that we’ll get more bad news? So, shortly after 11:00 AM on Friday, the market firmed and clawed back most of the morning losses by the session close. For short-term tactical traders, that was a neon sign instructing investors to keep on buyin’…at least until sellers show up with any sustained conviction.

Resilient? Persistently cheap? Strong bull trend? There is a dictionary full of descriptive phrases for recent price action. 

Despite the market looking past Friday’s hideous Employment report, there still are some significant technical hurdles that need to be cleared. One is that the Russell 2000 remains stubbornly below its 10% correction level (671.36). If the recovery is truly sound, one would expect strong leadership from the Russell 2000. While the index is the strongest of the major averages for 2010 (up 4.93%) and also produced the strongest rally from its 2009 bear market low (117.74%), it was also the only of the major averages to officially enter bear market territory (down 21.22% from its bull cycle high).

Another technical hurdle is the S&P 500’s current challenge of a potentially major resistance barrier. 1115.36 and 1140 are respective 50% and 61.8% upside retracements of 2010’s range.  These are significant because 2010’s “correction” of 17.12% is by far the steepest since the bull trend began in March 2009. Mixed in there also is 1121.44 which is a 50% upside retracement of the 2007-2009 decline. The index continues to struggle with its 200 Day Moving Average (1115.39) as resistance. May 21, 2010 was the first full day spent below the Average since May 29, 2009. Since May 21, 2010, there have been five days (assuming today’s low holds above 1115.39) during which the index has spent the day entirely back above the Average.     

We continue to believe a tremendous amount of good news is priced into the market at current levels. If the Fed blinks and does not come through with precisely the right accomodative language tomorrow, short-term momentum could quickly turn negative. 

**************************************************************   

Just to fill in some gaps….

May’s New Home Sales figure was originally reported at 300,000 (seasonally adjusted annual rate) which was the lowest rate on record, according to Bloomberg. Even that figure did not tell the whole story. In today’s report, May’s record low pace of 300,000 was revised to 267,000. Further, April New Home Sales were revised down from 504,000 to 422,000 and March New Home Sales were revised down from 411,000 to 384,000. That makes the total downward revision during those three months 142,000 or 11.69% lower than what was originally reported.

Comparing revised and original data to prior month’s revised and original data shows the following: March’s sales grew by 10.7% (originally reported at +33.4%), April’s sales grew by 9.9% (originally reported at +22.6%), and May’s sales were -36.7% (originally reported at -40.5%).

Still, June’s sales of +23.6% is a gain rather than a loss and despite June New Home Sales being the second slowest pace on record, investors are keenly focusing on good news and aggressively explaining away bad news.   

According to Reuters, the sales spike in June took available inventory to a 42-year low of 7.6 months. Given that the three months prior were substantially revised lower, it’s anyone’s guess whether or not June data is “real”.

**************************************************************     

This new measure will extend benefits to those who have been out of work for six months or longer (labeled “chronically unemployed”) to the end of November. Politicians are already talking about a ninth extension if the job market does not improve.   

This is completely oppositite of language of the past several months that talked about massive job-creation or job-savings due to prior stimulus measures. If all those jobs had been created or saved, why would benefits need to be extended? 

Supporters of the benefit extension point to the fact that recipients of jobless benefits will spend those funds quickly and by doing so, help support the economic recovery. Another question….if that’s the basis of our recovery, how sustainable is that? It sounds like a very short-sighted and certainly temporary solution. 

There are two key upcoming data points which will tell a lot about the real state of the Economy. June Existing Home Sales comes out tomorrow morning at 10:00. Earlier this week, we saw much weaker-than-expected results from NAHB Housing Market Index and Housing Starts. Building Permits, however, were stronger-than-expected which got market-watchers thinking that Housing Starts may be stabilizing. Advanced Q2 GDP comes out on July 30 at 8:30. This is the first of three estimates of Q2 GDP. After Final Q1 GDP (+2.7%) matched the most pessimistic estimate of any of the three readings on Q1, it is reasonable to expect a weak first reading on Q2 and possibly a downward revision to Q1. 

The Major Averages are all within 3.5% of break-even for 2010. The Russell 2000 is currently down 0.89% for the year but 7.67% below its 10% correction level. The Dow 30, the narrowest market gauge, is the only one of the major averages currently above its 10% correction level (by 0.72%). Only two of the nine S&P Sectors (Consumer Staples and Utilities) are currently above their 10% correction levels. We believe the above evidence suggests that underlying market sentiment is tentative, at best. Further, the on-going consolidation at or below 10% correction levels indicate that sellers are very willing to engage at increasingly lower levels. 

************************************************************       

We looked at performance from June closes to July closes, June closes to July highs, and July highs to July closes going back to 1990. Some of the findings were rather surprising and strongly argue for at least some measure of pull-back before the month is over.

·         In every year of the sample (twenty years), July highs were equal to or higher than June’s close.

·         Eleven of those twenty years saw July’s close below June’s close by an average of 2.57% with the largest negative reversal being 7.90% (2002)

·         In six of the past fourteen years, there has been at least a 5% pull-back from July’s high to July’s close. The largest of which was 8.33% (2002)

·         The average pull-back from July’s high to July close has been 2.85%.

·         Average July performance for the past twenty years is +0.32%. Currently, the index is +6.25% for the month.

·         July 2009’s performance was +7.41% which was the strongest July in the sample. Second strongest July was +6.80% (1997)

Based on July’s performance over the past twenty years, if the index was to match the strongest July (full month performance) in the sample, that would take the index to 1107. Further, if the index was to match the strongest move from June’s close to July’s high in the sample, that would take the index to 1117. We view those levels as key areas of resistance.

Conversely, if the index was to match the average performance for July over the past twenty years, (+0.32%), that translates into SPX 1033 (down -5.6% from its current level).

It was indeed a good week….now what?

Beginning in late April (April 26 in most cases), the broad market began a corrective process that is still on-going by any technical measure. Looking just at the four major averages above, the indexes remain below 38.2% upside retracements of the declines that began in April and range from 14.6% (Dow 30) to 21.2% (Russell 2000). Also, the indexes remain below their respective 200 Day Moving Averages. Below are both levels for the averages.

Dow 30:  10,242, 10,365; S&P 500: 1091, 1112; Naz 100: 1837, 1840; Ru 2000: 648, 638.   

While 5% rallies for a week are certainly welcomed news after the brutal declines of the preceding ten weeks, there are two important pieces of data to consider as we move into Q2 earnings season. 

• Investors are now expecting very strong earnings and the season kicks off next week. Given how sharp of a broad market reaction followed STT’s positive earnings guidance, if earnings AND guidance don’t exceed expectations, investor sentiment could swing back to the negative in a hurry. 
• July 2009 produced the largest number of bank failures of the year and the second half of the year produced 68% of the failures of the year. Last week, four more banks were seized by FDIC regulators which brings 2010’s closure tally to ninety at an insurance fund cost of $17.77 Billiion. 

How the broad market responds to actual earnings news as earnings season begins and the important technical levels above will likely set the tone for at least the next few weeks.

****************************************************************  

Markets around the world exploded to the upside as analysts, economists, and traders interpreted the currency policy move by Beijing as a clear sign of strength related to the Chinese economy. Further, the thought went, demand from China was immediately expected to bolster recoveries around the world.

By the time US markets opened, those around the world who were aggressively bidding and buying US index futures quickly turned negative. The cash indexes hit their highs for the day (and week, so far) between five and thirty minutes into the trading day on Monday. At those peaks for the Major Averages (Dow 30 10,594, S&P 500 1131, Naz 100 1940, and Ru2000 677) the averages abruptly reversed from 50%-61.8% upside retracements of declines that began on April 26.

50% and 61.8% upside retracements of the declines that began on April 26 are as follows. Dow 30: 10,508 and 10,685, S&P 500: 1130 and 1151, Naz 100: 1906 and 1942, and Ru2000: 677 and 693.

At least from a short-term perspective, there is a great deal of selling pressure that seems very quick to engage in the respective 50%-61.8% upside retracement areas for the major averages.

Separately, New Home Sales for May came out at 10:00 this morning at a seasonally adjusted annual rate of 300,000 (est. was 410,000) which was the lowest monthly pace on record….dating back to 1963 when records first began being tracked, according to the Washington Post. 

This is the first view of New Home Sales data without federal government incentives.

**************************************************************

2009 closed at 10,428.05 which was up 61.18% from the March 2009 low and up 18.8% for 2009. While that 18.8% may not seem like much, the first ten weeks of 2009 seemed like the financial world was in the process of outright collapse. If someone had said in January or February that the index would reverse and post an 18-19% gain for the year, it is doubtful if anyone would have taken that person seriously. As 2009 wrapped up, the broad market seemed to shift gears and begin to consider market risk again. 

2010 has produced two separate periods of rallies up through 10,428 as well as two periods of declines that carried the index below 10,428. Further, the mystique around Dow 10,000 is alive and well.

As we are closing in on the half-way point of 2010, it is noteworthy that there have been two days this year in which the index has spent a full trading day below 10,000. Sixteen days of 2010 have produced intraday dips below the 10,000 barrier.

Strong export data from China yesterday helped investors look past a slight rise in Weekly Jobless claims and the market took off. On Thursday, supposedly “leaked” information out of Beijing showed that exports in May climbed 50%. Markets around the globe responded quite positively as China is currently the third largest economy in the world.

Looking at the US indexes, yesterday’s rally brought the Dow 30 back into positive territory for June but it remains -2.45% for 2010. Year-to-date performance on the other major indexes are: S&P 500 -2.53%, NASDAQ 100 -1.62%, and Russell 2000 +2.30%.

With the seemingly daily increase in broad market volatility, break-even levels for 2010 are becoming increasingly important from a technical perspective. These levels are: Dow 30 10,428, S&P 500 1115, NASDAQ 100 1860, and Russell 2000 625.

At least to start the day, the markets look to be weaker as May Retail Sales came in MUCH weaker-than-expected at -1.2%. Estimate was for an increase of 0.4%.

***************************************************************