STOCKS START THE SECOND HALF STRONG -- TECHS CONTINUE TO LEAD - GM AND FORD HIT 52-WEEK HIGHS -- US DOLLAR TUMBLES -- GOLD BOUNCES ON DOLLAR WEAKNESS
GOOD NEWS BOOSTS STOCKS... Today's Market Message was written by Arthur Hill. - Editor
Good news brought out the bulls and stocks started the second half of the year on a strong note. The Institute for Supply Management (ISM) got things started with a report that their June manufacturing index advanced to 56. Anything above 50 shows economic expansion and this was the highest reading in 14 months. Acquisitions, buybacks and privatizations were also prominent on Monday and this further fueled the bovines. AT&T (T) agreed to buy Dobson Communications (DCEL), Carlyle Group offered to buy Virgin Media (VMED), Manor Care (HCR) agreed to be taken private and Charles Schwab (SCHW) offered to buyback $2.3 billion of its stock. On Chart 1, The Dow Industrials got a nice bounce off its 50-day moving average and moved back above 13500. The move reinforces support at 13250 and keeps the uptrend alive for the Dow. The Average has been range bound over the last four weeks and the direction of the break will dictate the next signal. Look for a move above June highs to affirm the current uptrend and a break below the June low to reverse the uptrend.
Chart 1
BIG TECHS LEADING THE WAY... The Nasdaq 100 ($NDX) hit a 52-week high on Monday and moved above its June high. NDX was the only major index to break above its June highs today and big tech stocks continue to show leadership. John Murphy pointed out leadership from Intel (INTC), Cisco (CSCO) and Oracle (ORCL) on Friday and all three were up in afternoon trading on Monday. Chart 2 shows the Nasdaq 100 and a rising price channel formed over the last two months. The index has been working its way higher with a series of higher highs and higher lows since early May. This is the basic definition of an uptrend (higher highs and higher lows). NDX bounced off its 50-day last week and the low at 1900 marks the first support level to watch for signs of weakness.
Chart 2
LARGE-CAPS AND SMALL-CAPS LAG TECHS ... While the Nasdaq 100 moved above its June high, the S&P 500 and Russell 2000 remain well below their June highs and are not as strong. The S&P 500 represents large-caps and the Russell 2000 represents small-caps. Together, these two indices represent a big chunk of the US stock market. Both indices formed lower highs in mid June and support from the June lows holds the key. The Russell 2000 has key support at 820 and the S&P 500 has key support at 1485. Despite showing some relative weakness, the bulls deserve the benefit of the doubt as long as these key support levels hold.
Chart 3
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Chart 5
BREAKOUTS FOR GM AND FORD... General Motors (GM) and Ford (F) are two old-school manufacturing stocks and both broke to 52-week highs recently. These new highs suggest that business is better than it was a year ago and this is another boost to the manufacturing sector. On the weekly chart, GM surged above its February high with a big move over the last five weeks. GM doubled in 2006 with an advance from 18 to 36 and then consolidated. The break above consolidation resistance affirms the current uptrend and GM is on a roll.
Chart 6
Chart 7 shows Ford over the same time frame. The stock reversed its big downtrend with a surge in the third quarter of 2006 and then consolidated for around 9 months. The consolidation traced out an inverse head-and-shoulders pattern and this is a bullish continuation pattern. The surge above 9 broke neckline resistance and the upside target is the next resistance level around 11.
Chart 7
DOLLAR WEAKENS FURTHER... The US Dollar Index declined sharply over the last two days and the British Pound hit a 26-year high against the Dollar. Chart 8 shows the British Pound Index ($GBP) in a long-term uptrend and moving to a new high. On Chart 9, the US Dollar Index surged above 83 in the first half of June, but gave it all back in the second half and broke below its June low today. The index also broke below the May trendline and this calls for a continuation of the February-April decline. Chart 10 shows a 2 1/2 year view of the US Dollar Index and the long-term trend is clearly down. The index met resistance from the trendline extending down from March 2006 and the June high marks the fourth touch. Two reaction highs are required for a "tentative" down trendline and three touches makes this a "valid" down trendline. Even though there is support around 81 from the Jan-Mar 2005 lows, the larger downtrend dominates and the odds favor a break to new lows.
Chart 8
Chart 9
Chart 10
GOLD SURGES ON DOLLAR WEAKNESS... The decline in the US Dollar Index over the last few days provided a boost for gold. Chart 11 shows the US Dollar Index and the StreetTracks Gold ETF (GLD) in 2007 and the inverse relationship remains in place. In the first period (blue box), GLD surged from early January to mid April and the US Dollar Index declined during this time period. In the second period (red box), the US Dollar Index bottomed in late April and moved higher until mid June. The StreetTracks Gold ETF (GLD) countered with a peak in late April and decline until the end of June. GLD continued lower after the US Dollar Index peaked in mid June, but appears to be getting back on track with a surge over the last few days.
Chart 11
On Chart 12, the StreetTracks Gold ETF (GLD) bounced off its 200-day moving average with a gap up three days ago and advanced back above 65. Despite this strong move, the 2-3 month trend remains down and GLD is testing trendline resistance. The ETF remains with lower lows and lower highs since late April and this is the most basic definition of a downtrend. A move above the mid June high is required to break this series, forge a higher high and reverse the downtrend.
Chart 12
