Commentary posted 12-Jun-2005 at 10:00 AM PT

Friday's Action:
A Commerce Department report that showed a 6.3% spike in April's US trade deficit weighed on stocks Friday, although Blue Chips managed to climb fractionally higher at the close. Major overseas markets reported higher results on Friday. London's FTSE closed up 0.42%, Frankfurt's DAX closed up 0.51% and Paris' CAC finished higher by 0.73%. Japan's Nikkei closed up 1.28%, Hong Kong's Hang Seng closed up 0.28%, and Sydney's All Ordinaries Index finished higher by 0.27%. In economic news, Import Prices fell 1.3% in May; Export Prices were lower by 0.1%;US Trade Balance for April shows a deficit of $57.0 billion vs a revised $53.6 billion the month before. Volume came in at 1.67 billion shares traded on the NYSE and 1.46 billion shares traded on the Nasdaq. Market breadth was mixed, with NYSE advancing issues over declining issues by 1.01, and up volume over down volume by 1.01; Nasdaq declining issues over advancing issues by 1.12, and down volume over up volume by 2.09. Leading sectors were Disk Drives, +3.71% and Chemicals, +0.61%. Laggards were Semiconductors, -1.77% and Internets, -1.43%. September became the front month for equity index futures on Thursday. Sep Nasdaq 100 futures closed 13.50 pts lower to settle at 1535.50, while the Sep S&P's settled down 2.20 pts at 1203.90.

Weekly Recap:
Stocks finished mixed in an uneventful week of trading. The Dow and S&P rose fractionally while the Nasdaq slipped. The action was fairly mild as the largest move in the S&P for the week was a six-point gain on Thursday. The index moved less than 3 points every other day.

Besides mid-quarter updates from TXN and INTC, the major events of the week were two speeches by Fed Chairman Greenspan. On Monday evening, Greenspan stated that the flattening yield curve did not necessarily indicate impending economic weakness (?). That led to an early Tuesday stock market rally, but late afternoon selling left the S&P with a loss for the day. On Thursday, Greenspan testified before the Joint Economic Committee of Congress, saying that "the US economy seems to be on a reasonably firm footing, and underlying inflation remains contained." The market had its best day of the week following Greenspan's comments.

There were no major economic reports last week. Initial claims fell slightly for the week ended June 4. The April trade deficit was slightly lower than expected, but neither report attracted much market attention. Oil prices finished slightly lower, even after a late-week surge, as possible hurricanes in the Atlantic raised fears of a temporary curtailment in production. The 10-year note yield rose slightly this past week on a Friday sell-off, closing just above its downward sloping trendline.

For the week, the Dow gained +0.5%, the S&P 500 finished +0.2% higher while the Nasdaq slipped -0.4%. The small cap Russell 2000 gained +1.0%. Earnings warnings may pick up in the next couple of weeks as we approach the end of the calendar quarter. There are also some important economic reports scheduled next week. The PPI is due on Tuesday, and the CPI on Wednesday. The core rate for each will be closely watched for inflation trends. A 0.2% gain for each is expected.

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The COT Report:
The latest Commitments of Traders report from the CFTC shows that Commercial Hedgers sold some 3,800 S&P 500 futures contracts last week to bring their net short position to -17,804 contracts. Large Traders were net short -6,611 contracts, with the entire offsetting net long position of +24,415 contracts held by Small Traders, the so-called "weak hands". For the Nasdaq 100 futures, Commercials sold some 1,000 contracts to bring their net long position to +9,784 contracts. Small Traders were net short -7,568 contracts in the Nasdaq. Commercial action in Dow futures saw the smart money sell some 900 contracts to bring their net short position to -13,442 contracts.

Commercial Hedgers were better sellers in the S&P's last week while small traders were better buyers, a short term bearish sign. Commercials remain net short in the S&P futures and that has been an intermediate term bearish sign historically.

The Short Term Outlook; 1-5 Days:
Friday's price action was mixed, so we don't have a directional bias for Monday. A positive mid-quarter report from Intel on Thursday after the close was met with selling on Friday. INTC ended up being the biggest drag on the Dow, while the semiconductors were the weakest sector. The chip stocks weighed on the Nasdaq and the market in general. The chart below shows the Semiconductor Holders (SMH) falling back below its previous highs in March and December. The 9-day RSI flagged a negative divergence, while the bollinger band width turned down for the first time since the March peak. Downturns in bollinger band width are often a signal of a short-term market peak. The weekly chart shows the SMH making a downside weekly reversal.

The chart of the Nasdaq confirms a similar downturn in band width earlier in the week, as price backed off from its recent high near 2100. The weekly chart also shows a downside reversal.

Monday's Look-Ahead:
The 60-mn NDX chart below shows that the StochRSI indicator is in the BUY zone. For Monday, resistance for the S&P's comes in at 1210 and then 1212. Support lies at 1195 and then 1190. For the Naz, resistance comes in at 1557 and then 1561. Support lies at 1523 and then 1514.

The Intermediate Term Outlook; 2-6 Weeks:
The weekly chart of the NYSE McClellan Summation Index has been a fairly reliable indicator of significant market tops. The chart below shows the weekly NYSI with the stochastics oscillator below. While the SI has not turned down yet, the STO has certainly reached the overbought zone. We could reasonably expect a reversal to the downside from these levels.

Free Stock Picks!
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Top Stock Picks for Monday, June 13, 2005:
CBRL,JNPR

Good Trading!

Charts and data appearing in today's column are courtesy of:
StockCharts.com

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S&P 500 Futures: Bearish since Nov 09, 2004
Naz 100 Futures: Bullish since Mar 22, 2005
Dow Ind Futures: Bearish since Nov 09, 2004  

Jun 13 - Jun 17

Mon: No reports due; 
Tue: PPI, Retail Sales; 
Wed: Business Inventories, CPI, 
     NY Empire State Index, Capacity 
     Utilization, Industrial Production; 
Thu: Jobless Claims, Housing Starts, 
     Building Permits; Philly Fed Survey; 
Fri: Current Account, Consumer Sentiment.