DROP IN CONSUMER SENTIMENT -- AND NEGATIVE PPI NUMBER -- CAUSE SELLING IN OVERBOUGHT MARKET
DROP IN PPI NUMBER SENDS BOND YIELDS LOWER... Today's negative PPI report means that wholesale prices (prices paid to producers) have been dropping for two months in a row. Falling prices raise fears of deflation, which is normally good for bonds and bad for stocks. At least that's how the markets took the numbers today. Bond yields fell to a new low (meaning that bond prices rose). Stocks fell. The prospects of lower rates sent the dollar lower. Gold and gold stocks jumped. Gold stocks benefit from lower rates, lower stocks, and a lower dollar. Sector-wise, technology stocks led the market lower today. The two strongest sectors were consumer staples and healthcare. A sharp drop in energy prices late in the week is causing profit-taking in energy shares. Auto shares and semiconductors also ended the week on a down note.
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AUTO SHARES DOWNSHIFT... Auto-related shares had a bad day. General Motors was one of the Dow's biggest losers. Its chart shows GM experiencing a potential price failure at its 200-day moving average and chart resistance at its April high. Its relative strength has been falling against the Dow. Delphi Automotive Systems was one of the biggest losers in the S&P 500. The stock plunged on massive volume. Not good.
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INTEL AND ADOBE WEIGH ON TECHNOLOGY GROUP... Earlier in the week we expressed some concern about the Semiconductor (SOX) Index slipping back below its early-December peak. Intel, which is one of big bellwethers for the chip group, has the same problem. The daily chart shows Intel puting in an apparent short-term top right at its December peak. That suggests that more profit-taking can be expected. The RSI line is turning down from overbought territory. The relative strength line along the bottom (vs. the S&P 500) is also stalling at its previous peak. Another technology stock that got hit hard today was Adobe. The chart shows the stock breaking its 50-day average and its May low in heavy volume. Adobe was the biggest percentage loser in the Nasdaq 100 Index, which itself was the day's biggest loser of the major stock averages. That means that the large techs are now leading the market into a downside correction.
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STOCKING UP ON STAPLES... One of the stronger staple stocks was General Mills. The food stock broke out today to a new 52-week high. It appears to be moving up toward its old highs in the 50-55 range. Other winners in the group were Brown Forman/B, Hershey Food, and Supervalu. The fact that consumer staples were the day's strongest sector suggests the market is turning a bit more defensive.
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HEALTHCARE WINNERS... Healthcare stocks continue to attract money. One of the strongest was Forest Labs which broke out to a new high on Friday. Other winners were Watson Pharmaceuticals, Boston Scientic, and Eli Lilly. LLY surged during the second half of the week on rising volume. It closed just above its May high on Friday.
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NATURAL GAS TUMBLES 10%... A record increase in natural gas inventories pushed the commodity into a 10% decline on Thursday. Just the day before (Wednesday) I wrote a positive piece on the commodity and its related stocks. Although my longer-range views on gas hasn't changed, clearly a drop of that size is going to cause some profit-taking in stocks -- and it did. So far, however, the damage hasn't been too bad. Apache Corp and Burlington Resources (the two stocks I showed on Wednesday) fell late in the week. The heavy downside volume in Apache is worrisome. Also the fact that it's threatening its 20-day average and support near 65. Even if that's broken, there should be good support near 62.5. The selloff in Burlington Resources has been milder -- both in terms of price and volume. BR appears to be holding at its 20-day average. It's likely, however, that energy stocks will remain under some pressure until energy prices stabilize.
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S&P 500 MAY RETEST BREAKOUT POINT -- FEWEST BEARS SINCE 1987... We showed this same chart on Monday. At the same time, we identified underlying support in the S&P 500 in the 965-950 region. The two horizontal lines show where those two support numbers come from. They're simply the peaks that were formed last August and last December. A pullback to that zone wouldn't be surprising. If the intermediate uptrend is going to continue, however, it's important that prices not fall too far below the lower line. There's no question that the market is overbought. The RSI line is trading over 70 for the first time in a year. The daily MACD lines are also up against the highs of the past year. The unusually high degree of bullish sentiment is also troublesome. Investors Intelligence reported this week that bullish investment advisors had jumped to over 58%, which is near the highest levels in five years. Even more troubling is that the % of bears dropped to 16%, which is the lowest number since 1987. The market usually climbs a "wall of worry". It doesn't look like there are enough people who are worried right now.
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