The markets showed erratic trading Thursday, with up and down trading repeating to end with small losses. Volume increased with the decline to create a new distribution session, a sign that large traders were getting tired waiting for the rally to renew. That doesn't end the overall market uptrend, four or five such sessions in a short period are needed to kill the rally. However they are a sign of nervousness. That shouldn't be a surprise with the anemic progress of the recovery from the recession and lack of any job growth. Yesterday's lows followed a warning of a possible Japanese-style deflationary period from a regional Fed president. There is now a policy split on the Fed and today's GDP data was below estimates. Without consumer spending GDP growth will remain slow but consumers will not spend until they regain confidence. That is a circle we need to break with some encouraging policy changes from all levels of government.

Quarterly results continue to exceed projections and when noticed they provide support and even buying pressure for stocks. Oil giant Exxon Mobil was the latest to sparkle but many other small firms posted similar or better top and bottom line ‘beats'. Traders' moods are now showing quick shifts. We noted lots of gloom and down scenarios earlier this month and Advisory Sentiment included more bears than bulls for the first time this year. The optimism increased for the economy as companies reported solid quarterly results. Now we are seeing new pessimism. Since markets confound the expectation of the majority that could signal some new upcoming rallies. The Monday highs this week had most averages up more than 10% from lows that started July. Those moves stalled at major technical resistance and we are now getting some pullbacks. We need to quickly regain the upside momentum. The medium-term action suggests that could still occur. Watch the next few sessions for a renewed rally attempt. If it fails to develop, the markets will retreat further and likely give back the past months gains.

A review of the last week recalls that last Friday the markets posted solid gains as any concerns for the European bank stress-tested proved unwarranted. Traders refocused on the ongoing positive quarterly financial results with more good news from Ford, Verizon and Kimberly-Clark amongst others. Weekly indexes gains of 3.2%-to-4.1% included new breakouts from bases. There was news Friday of a 20% dividend hike for General Electric and hints a new acquisition activity. Genzyme got a takeover offer from Sanofi-Aventis providing more evidence that many companies are still historically undervalued as their earnings are soaring after two-years of cost cutting measures. The Friday trading many more upside breakouts. Those confirm the growing interest in owning stocks, forcing share prices higher. While more gains are expected we don't look for a vertical rally back up to the April market highs..

On Monday stocks rose for the third straight session after an upbeat outlook from FedEx and a jump in new home sales. UPS had an good news last week so together the shipping giants see no sign that the recovery is slowing and both project increased revenues later this year. New home sales soared 23% and inventories hit a 42-year low. Those are suggestive that home builders will have to increase their output in the near term. The technical action was again very strong. The NYSE had over 2470 advancing stocks for 4 of the last 5 trading days, boosting that cumulative advance-decline line close to its April high. The ongoing surge stock breakouts caused a ‘gap-up' on the broad NYSE bullish % indicator, and movement rarely ends that way.

Tuesday's trading started to the upside after chemical giant DuPont beat on the top and bottom line, while raising estimates for next quarter. That was followed by another disappointing report on consumer activity from the Conference Board, the second consecutive monthly decline after gains the prior three months. Consumer worries over the still too-high jobless rate has reigned in their spending, a situation unlikely to improve until the unemployment rates drops. Short term indicators continued up with some charts reached overbought territory. That meant their next down turns would offer warnings. The medium-term action continued to improve and there was a P&F buy signal at X 50% on the NYSE bullish % chart. 

On Wednesday the markets ended lower as a negative reading of the Fed Beige book caused afternoon weakness. Stocks were already down after a disappointing report on durable goods orders. Indexes continued to trade right around 200-day moving average levels which have halted the rally. Quarterly earnings continue to beat forecasts but those results were mostly ignored as traders studied the latest signs that the US recovery was stalling. The best performance continues to come from companies that export while domestic consumers remain very reluctant to spend. So far corporate buying has fueled the growth but that will not continue unless the broad public regains confidence and starts to shop again.Short term indicators have started top forming trading suggesting at least a consolidating pause. It is still possible we could see another run up to test last week's highs. However right now caution is called for and an end to immediate accumulation.

This morning's calculation for the long-term composite indicator showed a surge. The charts strengthened with a move above June's top and it now tests resistance from its April high. That is a strong sign the index weakness is only temporary. Can you help us? We are currently conducting a survey to see how the Investors Intelligence service can better serve our customers. If you have a few minutes to spare, please fill in a short survey (twelve questions) by clicking the link here. Please note all responses are anonymous.

Averages were surging a week ago and those moves continued on Friday and Monday. The combined three-day gains were about 4% in most cases. Virtually all index charts ended Monday with P&F buy signals. The index lows that started July showed the worst levels since the fall of 2009. The declines had generated new P&F sell signals but most charts showed trading holding above the bullish support up trend lines. From those lows to the highs that started this week the DJ Industrials, S&P 500 and NASDAQ Composite rallied 10.8%-to-11.8%. That brought their trading back up to their 200-day moving averages, which turned down the rally in June. Many indexes also equaled or came very close to their peak readings that month. The sideways trading also meant the down trendlines from the April highs were also close with some index moves just penetrating that resistance.

 

Some pause in a rally in normal when resistance is tested and that was again the case. On Wednesday there a few reversals down for the small-stock indexes including the S&P Mid-Cap, Russell 2000 and Value Line Composite. Each of those charts offers a high pole stoploss and the Mid-Cap decline Thursday hit it. Yesterday the short-term [50 points per box] DJ Industrials pulled back three-boxes from a spread double-top high at X 10,550, but were still well above their high pole stoploss at O 10.250. Also turning down was the NASDAQ Composite. It again failed to penetrate the down trendline with another ‘lower high' It still holds a buy signal with the stop loss 100 points below Thursday's low. Holding upward direction from Monday and bullish formations were the charts for the long-term [100 points] DJ Industrials, S&P 500, S&P 500, NASDAQ 100 and broad NYSE Composite.

 

Sector chart activity was also initially higher. The DJ Transports moved up to X 4,500, equaling its June peak. The DJ Utilities moved to a triple-top breakout at X 390 and then continued higher to end the chance for a bull trap. Both avoided downturns with the following weakness.

 

Spot gold reversed down to a three-month low at O 1160, still holding a sell signal at 1,229. Both gold indexes [XAU &HUI] also retreated with the HUI Gold Bugs also down to a new low. Crude oil reversed down from its double-top at $79, again failing to break resistance at $80. Support appears at $71. However both energy indexes [OSX & XOI] held buy signals and up columns.

Last week's strong finish for the averages produced another good week for climaxes. The recent positive readings have been the opposite of what occurred at the end of April and early May, just as the market was about to take its big hit.  This is an indication that smart money is in there and accumulating stocks that are down. The rally has moved up to the point where both the Dow and the NASDAQ Composite are even for the year. Both had up been up strongly in April and then showed losses at the start of July.

 

Last week there were 5 buying climaxes and 115 selling climaxes. This week was the fourth recent week with more than 100 selling climaxes, the highest of which was 197.

 

In the buying climaxes, none were S&P stocks. In the selling climaxes, 1 was a NASDAQ 100 stock, 6 were S&P 500 stocks, 9 were MidCap Stocks and 21 were SmallCap stocks.  

The last week has seen steady index gains that included impressive internal breadth. The new breakouts shown by stocks, averages and indicators caught the attention of some of the newsletter editors resulting in a rise in the bulls for the second week in a row. The bear and correction readings both declined. Earnings season is progressing with three out of four companies beating bottom line forecasts. More firms are also mentioning higher expectations for the remainder of 2010, ending most of the recent calls that we were slipping back into the recession.

 

The bulls moved up to 38.2% from 35.6% last week and 32.6% prior to that when the bears exceeded their number. Two weeks ago also showed the fewest bulls since the end of Mar-09, when the markets were just lifting off from their lows. Last week's reading of 35.6% for the bulls was exactly equal to the bears. We also noted the bulls and bears were even on 10-Jul-09, just before the DJ Industrials embarked on an almost 1,800 point rally over the following 10-weeks.

 

The bears moved down back a bit to 34.9% from 35.6% last time.  Two weeks ago at 34.8% they outnumbered the bulls for a positive trading signal. Bears around 35% are typically seen near the end of a market correction while their number usually reaches 45%, and higher, in a bear market. It was only in late April that the bears ended six-weeks of below 20% that occur when the markets are forming a top.

 

The advisors classified as correction fell back to 26.9% from 28.8% last week and 32.6% before that. This group is mostly bullish but they expect an intervening market retreat before the rally begins. They look to buy on dips. Advisors often shift from bearish to correction before they are ready to make a bullish commitment and vice versa.

 

The difference between the bulls and bears was +3.3% compared to zero the previous week and -2.2% the week before that. These are moderately bullish readings.