Nice Bounce, But Where Is The Volume?

Last Tuesday I sent an email out with the following -

“(F)rom a technical perspective the highest probability is a reversal in the next couple of days.”

“Will this simply be an oversold relief bounce or something more? …Will the bounce be strong, or merely a weak bounce into moving averages that can be shorted?”

Volume on the rally has been terrible and now the Market Averages are at key resistance. That is the trait of a Bear Market. The S&P 500 ($SPX) has made a vertical move into resistance on declining volume (Red Line). The same goes for the NASDAQ ($COMPQ).



Here are some important sectors. Consumer Discretionary (XLY) and Financials (XLF) have both bounced for the fourth time in recent months. Each of these bounces has been on declining volume into resistance. Maybe this time is different…

Retail (XRT) and Home Builders (XHB) have both had weak bounces on imploding volume and look like they are just consolidating before another leg lower in a sustained downtrend. Trends are trends until they break, and they usually go a lot farther than you think they can go.





These are important sectors. They tend to top out early and serve as an early warning sign for economic weakness and Bear Markets. They peaked in 2006 and 2007 and led the whole way down last time.

Here are some key stocks. These stocks are a huge percentage weighting of the Market Indexes and very important to the economy. All Microsoft (MSFT) has done is get stretched too far below its 50-day average (Black Line and Arrow) and bounce – again, on weak volume. That is the definition of a Bear Market! The same goes for Walmart (WMT).

General Electric (GE) held $15 for nine months and then broke below it in June. It bounced on very light volume and could only get above $15 by gapping above it at the open today – probably to try and trigger a short squeeze. But a failure here would be really, really, really bearish.

Chevron (CVX) has also simply bounced into resistance on horrible volume.





Volume is critical, because it tells you what the big boys are doing with their money. Weak volume means that they aren’t buying and that they are more likely simply moving prices higher, so they can unload more shares. That is the definition of distribution.

Before you get into Bear Markets, the big boys sell for months. They sell just enough to not break prices down completely. Prices sit in narrow ranges, until one day they break and then a flood of selling starts. Prices regress back to moving averages and then another leg of selling starts.

That is what has me so concerned about what is going on with the S&P 500. Nine months of a trading range that sees rallies into the 50-day on weak volume and then support gets broken, followed by a rally on weak volume.

This is yet another make or break point for the markets. A pullback that tests 1,010 and holds gets me excited again. A pullback that breaks 1,010 and next support is 950. Pretty sobering stuff.

Technology Leadership

There are so many components to Technology and so much going on in the group, that I need to break it up into a couple of pieces. I want to start with the names everybody knows, because people tend to like to buy what they know, even though it may not be a great place to be investing.

Here are a couple pairs of current leaders versus past leaders. You tell me which ones the institutions are selling and which ones they are adding to – Apple (AAPL)/Research In Motion (RIMM), BIDU (BIDU)/ Google (GOOG). RIMM is almost at its Bear Market lows! Google’s decision to take on China has been a windfall for BIDU.





What do you think Priceline (PCLN) and Amazon (AMZN) both breaking down together tells you about online consumer spending? EBAY looks worse!



SanDisk (SNDK) makes the “flash” memory for mobile devices, while Seagate (STX) has always focused on Hard Disk Drives for computers and servers. You can see that the mobile devices are where the growth is.



For semiconductors that go into phones, the key is to be a supplier of Apple and not a competitor. Cirrus Logic (CRUS) has chips in iPhones, while Nokia (NOK) devices are clearly not popular at the present time.



Will these trends of outperformance continue? I do not know, but the ability to determine what is leading and what is lagging is a critical skill for investors.

Also keep in mind that although these leaders have held up so far, they often get hit hard too when the markets correct.

Financial Sector Internals

The Financial Index ETF (XLF) looks like it is holding up well. But what is really going on inside the Financial Sector?



Broker Dealers ($XBD), Regional Banks (RKH) and Asset Managers (DJUSAG) have failed to hold key support and bellwether GE has also failed at support.






Broker Dealers
Take a look at the charts of Morgan Stanley (MS) and Goldman Sachs (GS). Nothing bullish here, with price < 50-day < 200-day. Those are Bear Markets.




Regional Banks
The charts of Bank of America (BAC), JPMorgan (JPM) and Wells Fargo (WFC) have broken key support.
Smaller regional banks like BB&T (BBT), Regions Financial (RF), Keycorp (KEY) and Suntrust (STI) have broken support.
PNC Financial (PNC), Fifth Third Bancorp (FITB) and Huntington Bancshares (HBAN) are holding on for dear life.



Asset Managers
Look at the charts of T Rowe Price (TROW), Janus (JNS), Franklin Funds (BEN), Federated Investors (FII), Waddell & Reed (WDR), Eaton Vance (EV) and Cohen & Steers (CNS). What do you think they are telling you about future fees in the Asset Management business?



Discount Brokers
The charts of Charles Schwab (SCHW), Ameritrade (AMTD), E*Trade (ETFC) and Stifel (SF) are all telling me that the markets are expecting trading volume to diminish significantly. I assume that most people like for buy long, so that would not be a bullish indicator for the markets.



I don’t know how to categorize these, but look at the charts of State Street (STT) and Northern Trust (NTRS). State Street peaked last October and Northern Trust is actually at the lows of the Bear Market!



Why are the banks important? Because every single one of them has the capacity to blow up the entire financial system with their exposure to derivatives. I haven’t posted this chart in a long time, but it is clear that the Derivative nightmare has never been address and may still come back to haunt us.

Very Oversold

I’m going to make this post an overview of different markets and sectors. I will then follow it up with a series of emails about key sectors so that you will be able to see the real damage that has been done within the components of the markets.

First, I want to show you are chart that I posted a few weeks ago. It is of the Energy ETF (XLE). I posted about how XLE had a classic reversal pattern and that I would not have been surprised by a bounce. In a bullish market, this bounce would probably have led to new highs, but the fact that the bounce failed into the 200-day (Green Line) shows you how the institutions were using the bounce to sell. This action is the definition of a Bear Market.



I bring this up, because the S&P 500 ($SPX) is very oversold and has the same potential pattern setting up. $SPX actually has two of the same pattern (Blue and Orange triangles), and the pattern low is right on the 38% retracement at 1,008.

I am not telling you that the market has bottomed. I am not telling you to go buy a bunch of anything. I am simply showing you what I see and what I look for. I have to keep looking at what is and making decisions off of what I see. The fact that two Follow Through Days have now failed concerns me greatly.



Here is the hourly S&P 500 futures chart. You can see that it is a downtrend made up of sharp plunges and shallow consolidations. Price seems set to make a sharp move very soon. Will it be up or down? A break of 1,010 would be a significant failure, as it would indicate that the potential bounce lasted all of a few days where most traders were out of town and that the bounce was sold hard. If there is a rally from here, then is it merely an opportunity to short the bounce?



Here are some of the sectors I will be deconstructing today.

Financials (XLF) are holding right on support. Failure from here would not be bullish. This chart looks like a goal line save, but wait until you see how some of the subsectors of Financials look…



Semiconductors have held support four times in recent weeks. Support had better hold or you know the big boys have been selling the bounces. Semiconductors are normally a leading indicator for stocks. It would be very bad it they break critical support.



The 30-year Treasury Yield is on the brink of breaking down. This would be very bullish for Treasury Bonds and give you a clear picture of just how bad things are for the economy.



Crude Oil ($WTIC) has held support and bounced weakly into the 200-day average. If price breaks support, then what does that say for the economy – especially if it happens with a breakdown in some of these other indexes and the 30-day Treasury Yield?

Social Security “Means Test” and "Two-Tiered" Pensions

http://blog.lifecourse.com/2010/02/californias-fourth-turning/

“The very political coalitions that tend to prosper during (expansion) - those which win by outbidding the others on how much they can distribute pleasure, borrow from the future, and undermine institutional barriers—guarantee that the whole system has to be smashed to smithereens before it can be rebuilt. Right now, we have politicians in power whose entire political careers have been built around the wrong logic for a (crisis).”

Here is a recent interview of House Minority Leader John Boehner –

http://link.brightcove.com/services/player/bcpid1886260998?bctid=104611069001

“I think raising the retirement age, going out 20 years – not affecting anyone close to retirement, and eventually getting the Retirement Age close to 70 is a step that needs to be taken.

I think secondly, instead of using the Wage Inflator, that increases in Social Security should be based on the CPI (Consumer Price Index). I think it is a more accurate reflection. Over time, it will have a significant impact on the “actuarial soundness” of the program.

And thirdly, I think we need to look at the American People and explain to them that we are broke and that if you have substantial non-Social Security income while you are retired (pause) why are “we paying you” at a time when we are broke? “

This guy is the Republican leader? No wonder the stock markets are tanking...

We all know that the CPI was altered in 1994 and is now a bogus measure of the Cost of Living, designed to significantly underperform inflation, thus keeping the annual COLA lower than it should be to maintain the purchasing power of your Social Security check.



For younger Americans who have to pay into Social Security every month, but know that we will never see a penny of the money, the natural question to ask of Boehner is “if the system is by definition broke, then why the hell are we being made to pay into it?”

Everybody has to sacrifice except for a few select social cows – think AARP and Public Employee Unions.

I’m going write this for the millionth time, at some point society will choose to finance the needs of the youth over the needs of the old – the needs of the future student over the needs of the retired teacher. We clearly haven’t reached that stage yet, but the battle lines are being drawn and the old are going to lose, because society ALWAYS sides with the youth.

If you are retired, then your benefits are going to get cut. Period. You will have to rely more on self-financing more of your retirement than you thought you would have to be.

http://www.governing.com/columns/public-money/Generational-Battle-Brews-Over.html

“Generation X and Gen Y are getting fed up and might not take much more. That's what I'm hearing from a number of younger public employees who responded to my column last month on the incumbent employee conundrum. The gist of their feedback was this: They don't appreciate bearing the brunt of pay cuts and benefits reductions -- the ones imposed by employers who try to balance the books on their pension and retiree medical plans by slashing compensation for younger employees and new hires. They'd like to see their elders share in the pain -- or at least pay their share.”

“Senior public employees who are vested in the retirement plans with ten or more years of service tend to consider themselves untouchable. So if Baby Boomer benefits can't be cut, the conventional approach to benefit rollbacks is to "tier" the retirement plan with reductions for new hires. This line of thinking leaves the next generation to pay for the mistakes and delusional thinking the Baby Boom negotiators -- on both sides of the collective bargaining table -- have had in the past decade.

There's no question that public-sector retirement benefits need reform, and in many cases this will mean a rollback that trims the benefits for new hires -- and thus younger workers -- disproportionately. But unless the burdens are shared more equally, a backlash could start to brew. We'll likely see it first in union halls: Younger workers will demand more seats on the bargaining committees and reject contracts that fail to share burdens of benefits reform more fairly.”

http://www.slate.com/blogs/blogs/kausfiles/archive/2010/02/16/does-the-uaw-even-want-more-members.aspx

“(T)he UAW has basically cut a deal with GM that protects its existing members in their $28 an hour (plus benefits) jobs, but give new, future hires a much worse deal: $15 an hour jobs. If those new workers are UAW members, they will be able to lobby within the union (and, more significantly, vote) to equalize the pay of the old-timers and newcomers at some intermediate level-- say $22 an hour. Why would existing UAW members want that? Better to keep the newbies out and exploit them for all they are worth in order to subsidize the cushy, unsustainable deal the UAW veterans enjoy. ... It would almost be as if the existing UAW members had become the profit-seeking owners of the company!”

“The union becomes just another quasi-shareholder representing a limited number of old-time members. Eventually, as those members retire and expire, the union ceases to exist.”

The battle lines are being drawn between the haves of the have-nots of the benefits wealth-distribution gravy train. Obamacare was simply a rouse to get the Taxpayer to pick up the healthcare benefit that was promised to union workers (both private and public), but whose funds were never set aside. But Obamacare will never end up being funded and may simply be the last great promise before Social Contracts are rewritten en masse.

Promised future pensions are so large that they have bankrupted the airlines and the auto makers and are now in the process of bankrupting states and municipalities (do you own any Municipal Bonds?).

Eventually, states and municipalities will be ruled by voters who do not benefit in any way from these pensions and they will change the payouts. They will either go to court and argue that the rights of the taxpayer were never represented in the negotiation of these benefits or they will put massive excise taxes on pension incomes. Either way, the pensioner will see a significant decrease in their take-home pension check and this will take a tremendous burden off the rest of the economy.

The Great 2011 Tax Hike

Marginal Income Tax Rate will rise -

The 10% bracket rises to an expanded 15%
The 25% bracket rises to 28%
The 28% bracket rises to 31%
The 33% bracket rises to 36%
The 35% bracket rises to 39.6%

The “Marriage Penalty” will return.

The “Child Tax Credit” will be cut in half.

The “Death Tax” will reset to up to 55% and the exclusion will return to $1,000,000 per person.

The Capital Gains tax rate will rise from 15% to 20% and the Dividends will be taxed at your Ordinary Income rate, instead of 15%. Both of these will rise another 3.8% in 2013.

The number of families who will fall under the AMT (Alternate Minimum Tax) calculation will rise from 4 million to 28 million next year!

There are many more taxes that are going up and deductions that are going down.

I'm am certain this is having an impact on stocks.

Have the markets been putting in a big 9-month top?

This is starting to look more and more like a broad-based Bear Market. Rallies are failing into the 50-day or 200-day averages and key leadership groups like Financials, Retail, Consumer Staples and Transports are getting blasted.

The markets are on their second Follow Through Day in as many months and there is a lot of distribution. You have never had a Bull Market without a Follow Through Day, but not all Follow Through Days lead to Bull Markets. Failures are indicative of Institutions selling into strength and are not a Bullish trait.

This feels more like the topping process of 2008 and less like the basing process of 2005-2007. That is no doubt a result of the fact that taxes policies and economic policies were much more pro-growth in 2005-2007 than they are today.

Critical support is obvious.



Financials
A couple weeks ago, I wrote about how Financials were at critical support and needed to see the big boys come in and buy them, or they were going to take the rest of the markets down with them.

The Regional Banks ETF (RKH) and General Electric (GE) are at critical support (GE just broke it this morning). GE had better make a stand soon, because so many Mutual Funds, ETFs and Indexes of many industries have significant holdings in GE. New 52-week lows were recently seen in Blackrock (BLK), Morgan Stanley (MS), Charles Schwab (SCHW) and Ameritrade (AMTD). Many others look horrible. Remember, Financials led the way lower in the last Bear Market, topping in 2006. I will be watching them closely here.




Retail
The Retail ETF (RTH) blew right threw the 200-day.

The Consumer Discretionary Index (XLY) just broke a triple bottom and the 200-day.

Walmart (WMT) has broken down on a rally into the 200-day.
Amazon (AMZN) has broken key support.

Target (TGT), Macy’s (M), Bed Bath and Beyond (BBBY) and Tiffany’s (TIF) have broken triple bottoms and are now below their 200-day averages.

Remember how so many were saying that the high-end consumer was holding up? With Tiffany’s blowing through support, the rich may be putting their wallets back in their pockets.

I am not making predictions on anything, I am simply showing you what is going on in the Retail Sector and it is clear that the big boys have been selling retail. Last week, lot of these companies are at levels where the big boys were historically willing to come in and defend price. They are now selling with abandon.



Technology
Tech has been a leader, but you have to wonder where things are going when you see key stocks like Cisco, Microsoft and Google breaking long term support.


Homebuilders
Some are holding on for dear life (NVR, Beazer (BZH)) while others have been blasted (Ryland (RYL), Pulte (PHM), KB Homes (KBH)).

Home Depot (HD) and Lowes (LOW) are now both trading below their 200-day averages. That puts them into Bear Markets.

This weakness is clearly a result of the ending of the housing tax credit. Housing never bottomed. It was simply propped up by a temporary government subsidy. If housing prices start to go lower again, then the consumer will feel a lot more pressure.

Commodities
Commodity-based economies like Australia (EWA) and Brazil (EWZ) have wedged up into their 200-day averages. That is a very Bearish setup. The reversal pattern I noted a few weeks ago may have played itself out.


Crude Oil (OIL) has wedged up into the old breakdown point and the 50-day average. Again, this is very Bearish.

Energy stocks as measured by the ETFs OIH and XLE are now in a Bear Market.


Agriculture stocks MOO (think Fertilizer and land movers) are now in a Bear Market.


EAFE is now in a Bear Market. EAFE represents non-US Developed markets. That is bad news…


These are a lot of ugly charts. These are very important sectors and stocks. This is how markets top, with key leadership groups breaking down first. I am not saying that we are in a Bear Market, but at best we are now in a split market where there are winners and losers. So at a minimum, you need to be very selective.