Three straight days of disappointing jobs data and renewed fears
about the strength of the economic recovery effectively extended
the previous week's tailspin. The Dow Jones Industrial Average
dropped below 10,000 on Tuesday, and kept on going, ending the week
with a 4.5% loss. Looking ahead, Todd Salamone, Senior Vice
President of Research, acknowledges the weak technical picture, but
sees support on the S&P 500 Index at 1,000. Todd also remarks
on the curious decline in the CBOE Market Volatility Index late in
the week, even as the SPX continued to weaken. Next, Senior
Quantitative Analyst Rocky White looks at the fabled "Death Cross"
indicator, and its cousin, the "Golden Cross." Rocky concludes that
the Death Cross is not a surefire predictor of doom ahead. Finally,
we wrap up with a look at some key economic and earnings reports
slated for release this week.
Recap of the Previous Week: Another Jagged Pill
By Joseph Hargett, Senior Equities Analyst
Bad week, bad month, bad quarter. How bad? When the second
quarter drew to a close on Wednesday, the Dow Jones Industrial
) recorded a loss of 3.5% for the month of June; the Dow plunged
10% during the quarter. That was the worst performance for the
venerable Dow since the stomach-churning first three months of
2009. The S&P 500 Index (
) fared even worse, losing 5.4% for the month of June, and dropping
12% for the quarter. The Nasdaq Composite (
) limped into the finish as well, shedding 6.6% in June and 12% for
Monday didn't necessarily offer a hint of what was to come. In
fact, the Dow spent much of the day in the black on a mixed bag of
economic developments. The Group of 20 (G20) met over the weekend
and vowed to halve their respective national deficits by 2013.
Meanwhile, consumer spending in May rose slightly more than
expected in May. But in the final hour, the Dow settled just a
little south of breakeven, down 0.05%.
The Conference Board delivered a double whammy on Tuesday.
First, it downwardly revised its index of leading economic
indicators for China, sending foreign markets into a nosedive. Then
it reported that its consumer confidence index for the U.S. tumbled
to 52.9 in June from the prior month's reading of 62.7. The market
choked on this "jagged pill,'' Senior Equities Analyst Elizabeth
Harrow reported in
("Alanis Morissette is making a comeback," Elizabeth explained.)
The Dow plunged 2.65%, or 268 points, to 9,870, settling beneath
10,000 for the first time since early June.
Wednesday dawned with the news that the private sector added
fewer-than-anticipated jobs last month, the first of three straight
days of disappointing employment data. Although the bulls fought
valiantly, encouraged by a report that business activity in the
Midwest expanded by more than expected in June, the Dow succumbed
to another late-session sell-off, and fell 0.98% for the day.
The hits kept coming on the employment front on Thursday, as
weekly initial jobless claims unexpectedly rose during the prior
week. Like dominoes, the rest of the day's economic reports also
fell below economists' views, with the National Association of
Realtors' pending home sales index falling 30% in May and the
Institute for Supply Management's manufacturing index dropping more
sharply than expected in June. Despite another attempt to rally
back above breakeven by the close, the DJIA fell 41.5 points, or
What the Trader Is Expecting in the Coming Week: Looking
For Support at SPX 1,000
Todd Salamone, Senior Vice President of Research
"As we enter this week's trading, support for the SPX is in the
1,050 area... The bulls might be somewhat encouraged by the VIX's
close below 30, as this level has marked peaks in volatility on
occasion, with October 2009 and February 2010 being recent
examples. However, per the chart below, note that in these months,
the VIX's 80-day and 200-day moving averages were sloping lower,
indicative of volatility being in an intermediate and longer-term
decline. Now, these moving averages are sloped higher, indicating
volatility is currently in an uptrend, increasing the risk for
another pop above 30."
-Monday Morning Outlook, June 26, 2010
A CBOE Market Volatility Index (
) pop above 30 is exactly what occurred last week, as the VIX hit a
high of 37.58 on Thursday, a 32% increase over the previous
Friday's close. The spiking action began as the SPX quickly moved
below support in the 1,050 area Tuesday morning. While the VIX
closed the week sharply below last week's highs, the danger for the
bulls is the close above 30 and its 50-day moving average, located
at 29.56, which could indicate that volatility is still trending
We have found the VIX's behavior during the past few days
peculiar. On the chart below, note the sharp drop that began late
in the morning on Thursday, even though the SPX didn't make much
headway from Thursday morning into Friday's close. In fact, since
the June 29 close, the SPX has lost almost 2%, and the VIX has
dropped from 34.13 to 30.12 in the same four days. This is unusual.
According to our research, the VIX has never declined as much, on a
percentage basis, during any other four-day decline of more than
1.5% in the SPX. For what it is worth, the VIX also declined amid a
retreat in the stock market in the days leading up to the March
2009 bottom, but the VIX's percentage decline then wasn't as great
as we just witnessed.
Clearly, the bears have the bulls on the ropes. The technical
backdrop continues to deteriorate, after a failure to move back
above the 160-day moving average during a rally in June and last
week's break below the recent trading range. So, while pessimism
has grown during this period, given the weakening technical
backdrop, the pessimism takes on less meaning from a contrarian
That being said, many technicians interpreted the breakdown
below 1,050 last week as a "head & shoulders" pattern sell
signal, with the breakdown creating an 880 target on the SPX.
Certainly, one has to take note of the bearish development and be
open to such a possibility. But the contrarian blood in us is
skeptical about this emerging consensus opinion. In other words,
the publicity surrounding last week's break of support may have
generated a crowded short trade. Remember the publicity surrounding
the SPX's move above its 200-day moving average two weeks ago? As
we soon found out, the crossover was nothing more than a sell
signal, even though many viewed the price action as a bullish
So, where is potential support after last week's breakdown? We
are focusing on the 1,000 area for a multitude of reasons.
- Per the chart below, the 1,000 area is the site of the
SPX's up-sloping 80-week moving average, a trendline that has
marked support and resistance in the past.
- 1,000 marks a 38.2% retracement of the March 2009 low and
the April peak.
- 1,000 is 50% above the 666 intraday March 2009 low.
- 1,000 is a millennium mark - it proved to be a hesitation
point in the summer months of 2003 when the market began to
claw back from the bear market lows.
As the proverbial "lines in the sand" continue to be redrawn
amid a plunging stock market, a question we have asked is, "What is
the catalyst that reverses the slide?" Amid the continued stream of
bearish headlines and the weakening technical backdrop, there is
little urgency for the shorts to cover and for sideline money to
move into the stock market.
With the SPX down nine of the past 10 days, and the PowerShares
QQQ Trust (
) down 11 consecutive days, the market could certainly experience
another sharp, short-lived rally. One short-term catalyst that
could push the market higher is short covering related to expiring
index puts, with July expiration only nine trading days away when
the market opens Tuesday morning. But the dark side of this put
open interest is that if major put strikes just below currently
levels get taken out on the downside, sellers of the puts will add
to their short positions, creating sharp, exhaustive-like
Continue to have both put and call exposure for all time
horizons you are playing. The Russell 2000 Index's (
) close below its 200-day moving average and the 600 level is cause
for concern, so think about lightening up in this area if you don't
have put protection.
Todd Salamone, our Senior Vice President of Research, will
talk about "Trading Strategies for Today's Market" when he hosts
a live e-chat Tuesday, July 6, 2010, from 1-1:30 p.m.
Sign up here
for this free MoneyShow event.
Prepare for the investing week ahead. Every week, Bernie
Schaeffer and his staff provide you with their insight about what
has happened and, more importantly, what will happen in the market.
We dig deep and show you what's happening behind the scenes, and
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Indicator of the Week: The S&P 500 Index's "Death
By Rocky White, Senior Quantitative Analyst
Two heavily watched moving averages on the S&P 500 Index (
) are converging. A lot of technicians are talking about the
upcoming "Death Cross." That's when the 50-day moving average of
the index crosses below the 200-day moving average. This is looked
at as a bearish signal -- especially since the last Death Cross,
which happened in late 2007. The market fell more than 40% over the
next 52 weeks.
The opposite of the Death Cross is the Golden Cross, which is
when the 50-day moves
the 200-day. Below is a chart of the SPX since 1998 with each
Golden Cross and Death Cross marked. The Death Crosses that
occurred in late 2000 and late 2007 were very good sell signals.
The other four simply marked bull market pullbacks.
Quantifying the Data:
Going back to 1972, there have been 18 Golden Crosses and Death
Crosses. I looked at the data following these signals to see just
how reliable they are at predicting the market. The first table
below shows the average SPX returns after a signal from one month
to one year later. The second table shows the percentage of returns
that were positive. The term Death Cross is a lot scarier than the
The table shows that the average return three and six months
after a Death Cross outperform the typical SPX returns, even though
there are fewer positive returns than you would typically find.
However, there is underperformance one year later. The results
following a Golden Cross are quite impressive relative to what the
market usually returns.
Death Crosses have had mixed results as an indicator, at times
signaling the beginning of a painful extended decline, but at other
times signaling the end of a short-term pullback. It might be a
good idea to have hedges in place.
One thing to keep in mind about these widely watched technical
levels is that they tend to garner a lot of media attention. A
glaring media spotlight could actually have a contrarian effect on
the indicator. For example, if media attention to the Death Cross
strikes enough fear into traders, then they might sell before it
occurs, or put on hedges so they're not forced to liquidate losing
positions. In this situation, the selling pressure is exhausted by
the time the Death Cross occurs. Remaining sideline money and the
subsequent unwind from the hedges can then actually instigate a
This Week's Key Events: A Quiet Four-Day Week
By Joseph Hargett, Senior Equities Analyst
It's a short -- and quiet -- week on both the economic and
earnings fronts. Here is a brief list of some of the key events for
the upcoming week. All earnings dates listed below are tentative
and subject to change. Please check with each company's respective
website for official reporting dates.
And now a few sectors of note...
Dissecting The Sectors
The real estate sector remains one of our favorites as it
continues to perform well amid overwhelming pessimism from
investors. The iShares Dow Jones U.S. Real Estate Index Fund
) recently pulled back to its 200-day moving average and
found support at this key trendline. Meanwhile, from a
sentiment standpoint, the International Securities Exchange (
) and Chicago Board Options Exchange (
) 50-day buy (to open) put/call volume ratio is starting to
roll over. This could indicate that put traders are no longer
hedging their positions on the sector, removing a potential
headwind. There is also plenty of negativity from analysts.
Specifically, only 36% of the 1,067 analysts covering the
sector have doled out "buys." Any upgrades could provide lift
for the sector.
The Energy Select Sector Fund (
) suffered a major reversal on June 21, as the XLE rallied
into its 200-day moving average, and was soundly rejected.
The fund has since accelerated its decline, plunging below
former round-number support at the 50 level last week. This
region could now provide a ceiling for the XLE. Elsewhere,
the Oil Service HOLDRS Trust's (
) recent failure at its 40-day moving average has forced
the shares further below the psychologically important
century mark. A continuation of this decline could send the
OIH down for a retest of the 90 area. Oil prices, in
particular, have been under significant pressure since the
start of the oil leak in the Gulf. Combined with growing
strength in the dollar, this has helped reduce the price of
crude oil. In fact, the recent rally attempt in crude oil
was stopped in the $79 area once again last week, sending
crude futures sharply below $75 per barrel by the end of
the week. The buy (to open) 50-day put/call volume ratio on
XLE has been in decline since November 2009, which means
stocks in this group are not likely under accumulation. In
fact, they could be in distribution mode. Negative
headlines in this group, along with prospects of increased
regulation, have bearish implications.
Wall Street continues to punish the retailing sector,
with the S&P Retail SPDR (
) falling further below its 200-day moving average.
Traders continue to doubt the sector's wherewithal, and
last week's string of poor employment data threw
additional uncertainty into the mix. However, we have not
completely written off retail, as the shares have pulled
back to the 34-35 region. This area provided stiff
resistance in 2008, and a rebound from this area could
represent an opportunity to enter long positions amid the
current pullback. However, traders should consider
hedging these positions via a married put strategy to
protect against an unexpected pullback. Furthermore, it
seems that the International Securities Exchange (
) and Chicago Board Options Exchange (
) 50-day buy (to open) put/call volume ratio has been
driven higher by unhedged put buyers, or by players
simply replacing expiring hedges in the absence of
coincidental accumulation, as the rising ratio was
consistent with weak price action. If the headwinds from
speculative/unhedged put buying are over, this could
prove to be a buy signal for the sector. Within the
sector, some of our favorite performers include Chipotle
Mexican Grill (
), Netflix (
), lululemon athletica (
), and Coach (
). Meanwhile, some stocks to avoid due to their weak
technical backdrops include Abercrombie & Fitch (
) and Green Mountain Coffee Roasters (