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WEEKLY SUMMARY

After a great May and two-month long record-breaking rally, a quick change in sentiment and fundamentals have many investors feeling some June Gloom. For the five-day period, the NASDAQ Composite ($COMPQ) and S&P500 ($SPX) are off -1.57% to -1.87% on a bit of non-foreign profit-taking.

The primary impetus for Wall Street’s collective about face was headlined by soaring yields in the treasury market. With the 10-Year attacking 5.25% by Friday and up from last week’s close of 4.95%, the move, for very good reason, unsettled what had been a very optimistic Street. First, the cost of doing business just got more expensive. Wall Street is now focused on how the spike over the 5% benchmark will affect corporate profits and market valuations, which is now perceived as more suspect. Second, risk-free assets might also be viewed as more attractive versus exposure to equities at current levels. Higher borrowing costs affecting consumers still enmeshed in a weakened housing market might also be considered a potential problem. Finally, the long-lasting siren song by private equity types offering perpetual liquidity and cheap valuations has quickly quieted and its sustainability been thrown into question.

Three much related market calls / testimonies also served as a drag on the markets. On Tuesday Fed Chief Bernanke reminded a conference on monetary policy that risks to core inflation remained weighted to the upside. Further, an ‘adjustment’ in housing was likely to remain a difficulty for the economy longer than previously thought. Wednesday offered up Morgan Stanley’s (MS) unsettling “Triple Sell” market call. The banker’s proprietary model measures a “composite valuation indicator,” fundamentals such as growth and inflation and investor risk appetite. Analysts there went on to advise clients to slash their equity holdings and offered a minimum corrective move of at least 14%. And finally, Thursday afternoon, PIMCO’s Bill Gross, a Bond Bull for the last twenty-five years turned in his threads. The well-respected fund manager went bearish on treasuries. For its part, Wall Street did more than just listen after the news hit the tape. That day, a recovery effort from the -3.5% corrective move and test of May 1^st supports was quickly revisited as traders attaching themselves to further June Gloom efforts.

Elsewhere and also pressuring the markets on the week, a slug of same-store sales results didn’t help. The overall data suggested a weakened consumer and a second-straight month of mostly worse-than-expected data from the nation’s retailers. Wal-Mart (WMT), JC Penney (JCP), Nordstrom (JWN) and Target (TGT) were headline disappointments, while wholesaler Costco’s (COST) managed to be one of the few outfits pleasantly surprising the Street. A volatile week for energy prices also didn’t help matters. A large -3.25% decliner on Friday kept the July crude contract underwater for the five-day period, down -.32 cents at 64.76. However, news during the week that OPEC was not inclined to bump up supplies, a scare by Cyclone Gonu and a storm season just underway all negatively impacted the broader indices while the commodity rose in price over the first four trading days. Meanwhile, Friday’s pressure, which might elicit a resounding cheer on many occasions, came with a catalyst not nearly as endearing for equities. The weakness was apparently related to traders’ collective concern of dampened demand for energy prices due to anticipated higher interest rates and slower economic growth.

ON TAP THIS WEEK

So, who’s next? Last week we began with those words, as a condition of near entitlement was being felt as it related to mergers and acquisitions. Investors did end up receiving Avaya (AV), Solectron (SLR), Dominion Resources (D) and rumors and innuendos in Cadence Design (CDNS) and TD Ameritrade (AMTD) as tokens in that department. More importantly and as opined about last week, factors such as a strengthening rate environment, increased multiples and less choice deals did conspire in making the current investment theme appear not nearly as attractive or realistic in the here and now. Touché. 

One report that did have a positive impact on the market was National Semi’s (NSM) well-received and better-than-expected earnings results. Late Thursday the company posted earnings that beat the Street by five-cents with 28 cents a share on a higher-than-expected 5.8% sequential sales increase. The numbers were enough to spearhead a buy effort in the semis (SMH) and help persuade investors to nibble off the market’s first corrective move in three months time. Investors would like to see that buy side effort continue. On a much related note, peer Texas Instruments (TXN) holds its Mid-Quarter 2Q07 conference call Monday morning. It goes without saying that the report could act as a catalyst for profit-taking from Friday’s efforts or a reason to view recent lows as the latest missed buying opportunity and act as an extension of those gains.

For earnings hounds this week, the wild card is coming to us courtesy of the Broker / Dealer group (IAI). The Broker / Dealer group is thought by many to be a leading barometer for the market and with its most revered names on tap to report this week, the bulls and bears will be watching the reports closely. Thursday’s premarket earnings release from the crown jewel, Goldman (GS), will be the headliner. Analysts expect earnings of 4.75 a share from the investment banking behemoth. However, the company has been notorious for blasting past estimates, so real expectations will likely be north of that benchmark and reactions to the report, reflected in that idea. Investors should also be on the lookout for Bear Stearns (BSC), which reports that same morning and Lehman Bros’ (LEH) report on Tuesday.  

On the economic side, watchdogs have their hands full with data points covering growth and inflation. The headliner of the week will be Friday’s CPI and core reading. The closely-watched report will likely take on increased importance due to the prospects of higher interest rates and potentially increased vigilance by the Fed. Thursday offers up the typically less important PPI, while Wednesday’s Beige Book and retail sales could be market / sentiment movers. Elsewhere, the day-to-day movements of crude and the realities or perceptions behind them, could also easily affect conditions in the broader indices. As detailed earlier in this report, lower oil prices needn’t equate to being bullish for equities and vice versa with a bid in the commodity. Traders should continue to expect volatility in the product as potential storms, interest rate outlooks and the geopolitical can all act as catalysts at any given time.

Weekly Calendar of Key Reports

Monday
Economic:  NA

Earnings: Cantel Medical (CMN), Jos Bank (JOSB), Cyberonics (CYBX), Take-Two (TTWO)

Events: Mid Quarter Update Texas Instruments (TXN)

Tuesday
Economic: Treasury Budget (-$60.0B)

Earnings: Lehman Bros (LEH), RBC Bearings (ROLL), Finisar (FNSR)

Wednesday
Economic:  Import / Export, Retail Sales & ex-Auto (.6%, .7%), Biz’ Inv (.2%), Weekly Crude, Fed’s Beige Book

Earnings: Spartech (SEH)

Thursday
Economic: PPI & Core (.7%, .2%), Weekly Claims (315K)

Earnings: Goldman (GS), Bear Stearns (BSC), Smith & Wesson (SWHC), Adobe (ADBE), Pier 1 (PIR)

Friday
Economic: CPI & Core (.6%, .2%), Current Acct (-$202.5B), Empire Index (10), IP & UC (.1%, 81.5%), Michigan (88)

Earnings: Winnebago (WGO)

TECHNICAL PICTURE

Figure 1: S&P500 (SPY) Daily

As suspected might be the case last week, a heavy dose of June Gloom is now underway. Friday produced a well-deserved bounce on the heels of a very strong short-term oversold condition. However, while being a nice technical break in the action, it is considered just that—i.e. a bounce—as we enter Monday’s session.

As Thursday’s lows marked the first corrective move in three-months, bargain hunting off bearish sentiment extremes and technical supports of notice are a typical reaction. However, first reactions or “V” type bottoms off extremes don’t generally last without a retest, when such an abrupt overall move is witnessed. Looking above, a 38% retracement has already been recovered by Friday’s snapping up of relative bargains. With that said, the snapback of prices is also likely near levels of resistance and an area where reward-to-risk for bearish deltas is the favored proposition until further testing takes place.

Bullish Technicals

• Smart / Dumb $ Crossover per sentimentrader.com
• ISE Put-to-Call Ratio most bullish ratio since March 9th
• Short-term VIX percentage thrust 3-Day / 28% entering bearish extremes on 6/7
• Short-term indicators: TICK, Down Pressure, Breadth
• 3.5% Corrective move S&P500 / 1500 & 50-Day MA testing
• Short-term “Outlier 50-Day / Bollinger” SPY, INTC, MSFT, GS as of 6/7
• Smart / Dumb $ Crossover per sentimentrader.com
• Potential Attempted Rally Day per IBD

Bearish Technicals

• Topping patterns / zone resistance confirmed
• ‘Extended’ 4 / 20-year bearish cycle convergence, < 10% market correction        
• The ‘Best Six Months’ per Traders Almanac complete (Oct thru April)
• 10-Year note clears 5% and one-year highs / risk-free instrument vs equities
• Dow Theory derailed (trannies, utilities and industrials)
•  VIX Longer-term reversion to mean principle > 20% to 25% IV needed for true extreme
• Morgan Stanley’s “Triple Sell” 14% minimum House of Pain market call 6/6
• PIMCO’s Bill Gross turns Bond Bear after 25 years of being bullish on debt instruments
• The ‘Best Six Months’ per Traders Almanac complete (Oct thru April)
• Seven sessions of distribution in Naz’ over last month (May 10^th thru June 8^th)

Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum

The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

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