Planet Yelnick

Summer Rally at Last

We seem to have begun the long-awaited and seldom-very-robust summer rally. The Elliott Wave International STU believes it will last one to three weeks: one week puts it into one of their turn dates, Aug5; three weeks puts it into D-Day for the Google IPO, around Aug19. The latter seems more likely. And fits with Yelnick's Markers of the Fall denouement for this whole wave 2 since Oct02. The three markers are:

Failed Rally

Zoran, Prechter and other Ellioticians have seen this market ready to finally reveal itself, but Yelnick has kept relatively quiet this summer, as it appears have most everyone else in this market - program trading has gotten to as high as 70%. For a person, better to wait this one out, what with the quagmire in Iraq, the slackening economy, the looming election, and this lengthy trading range. For a machine, however, the beat goes on. While traders lollygag, market 'bots slavishly watch for the 200 DMA in the S&P, and in a fit of robotic precision, cause rallies off it, particularly at the lows in May and now in early July.

Yesterday and today, however, we had an up/down rally which bounced off the moving average then fell below it. As was explained today by the STU, "The inability to hold above this average kicked in sell programs and away we went today." What the 'bots giveth, they also taketh away.

What would normally happen now is a dissipation of the down move and a test of the 200 DMA line from the bottom. We shall see if the programs follow this script. If the attempt to break the line fails, expect the market to kiss it goodbye and sink into those Sept/Oct dips that the market is prone to. Timing for the kiss-off is over the next two weeks. Size of the drop may be in the range our Yelnick reader Virchull suggested in a prior post: certainly below Dow9500 and maybe below Dow9000.

Will the NASDAQ drag the Dow down? Bet on it!

Virchull, a loyal Yelnick reader, sends in this analysis:

In the mid-1990s, the NASDAQ Composite started up earlier and faster than any other major index. The Dow and the S&P500 followed along. In 2000, the NASDAQ plunged, and the Dow and S&P500 followed, but not as extreme. The NASDAQ has led some, but not all of the bounces since 2000.

The NASDAQ is now very weak. Volume has been declining since 1/7/04. New highs have declined since 1/16. Highs versus lows have declined since 3/8. Proportional changes versus the Russell 2000 have declined since 2/12. Proportional changes versus the Dow Industrials have declined since 1/23, and a new spurt of these declines started down on 6/29. This latter situation has happened 6 times since 1991. In 5 of those cases, the average drop in the Dow Industrials was 5.7% over the following 6 weeks. At current levels, that is a drop of about 580 Dow points. In the 6th case in 2002, the Dow dropped 26% over 37 weeks. That would be a drop of 2650 Dow points.

Additionally, on Friday 7/9, the NASDAQ 150 day moving average turned down. This is a long term average, so it will continue down. In this situation, the historical record is consistent, but erratic. It is consistent in the 6 prior cases since 1987 that the NASDAQ continues down after the 150 MA turns down. The magnitude of the NASDAQ decline is erratic. It ranges from a 4.5% decline over 4 weeks in 1992, to a 66% decline over 54 weeks in 2001. The 6 percentage declines, in increasing order, are 4.5%, 6%, 13%, 19%, 32%, and 66%. Take your pick for your own outlook about the upcoming NASDAQ decline.

The recent historical record for the bubble is pretty clear that the NASDAQ leads the major moves in the Dow and S&P500. I believe that linkage is still in place because of US investor behavior, economic forces, and some international investment forces - like the Japanese economy and investments. If so, average historical performance says we'll see the Dow Industrials down 500 to 700 points by Labor Day. Not exactly a summer rally.

Markers of the Fall: Software Spending Slowing

This wave 2 since Oct02 has been driven by the old leaders of the bubble: tech and telecom. Many of the 'Lazarus' stock winners (stocks that rise from the dead) such as Sonus come from those sectors. The great bet being placed by Greenspan is that providing easy credit to keep consumer spending alive would eventually translate into business spending and bridge us across the post-bubble chasm. So far so good, but that easy credit is beginning to end, and so we are all looking for signs of business spending to fill the gap. The core spending to watch is spending on information technology, and the key to that is spending on software. Thus it comes with great dismay that the larger software companies are reporting softness in Q2 results and dampening future growth expectations. Analysts are debating whether this is a weakness in second-tier companies or (as reported in the NY Times two days after this post) a more general slowdown of high-tech.

Markers of the Fall: Economic Forecasts Go "Whoops!"

Friday's economic news and views were decidely mixed. The economy is showing more signs of slowing even as the economic commentators extrapolate a fairly rosy second half of 2004 (Friday's print edition of the Wall Street Journal had its quarterly economic analysis from leading economists, and the consensus was for fairly strong 4%+ growth for the rest of the year). As Sy Harding best put it, "Whoops":

In its statement accompanying the rate hike, the Fed said economic output continues to expand at a solid pace, labor markets have improved, and hiring has picked up.

Whoops. On Thursday and Friday we learned that new unemployment claims increased for the third week in a row, while economists had forecast they would decline. The ISM Manufacturing Index fell to 61.1 in June from 62.8 in May. The Chicago Purchasing Managers Index came in at 56.4 in June versus forecasts of 65.2. Ford and General Motors reported significant declines in auto sales. Even WalMart warned it is seeing a softening in sales. The monthly jobs report on Friday showed only 112,000 new jobs were created in June versus forecasts of 240,000. There were 11,000 jobs lost in the manufacturing sector, ending four straight months of growth. And we learned that factory orders fell in May (the June factory orders numbers will be reported in four weeks).

While the Fed is targeting incipient inflation, the current inflationary pressure seems largely driven by oil price increases (that now seem to be over) rather than a reversal of the disinflationary environment of the past few years. Also, the rise of overall commodity prices since around Oct02 seem to have tapered off. What the Fed interest rate increase(s) may do is further slow the economy and increase deflationary tendencies rather than the reverse.