The following commentary was posted at Gillespie Research.
Summary
During July's first five trading sessions, stocks rose on one of them and fell the other four. The net toll on prices has been quite steep, considering the short amount of time involved. Therefore, July has thus far met the rather dour expectations I have laid out for it. A major test lies immediately ahead. However, even if the market passes this test in the very short run, I continue to anticipate a decline of double-digit magnitude in the bellwether averages during the month.
Updated Numbers
The following two tables lay out some important parameters, employing my seven-measure tracking group as the proxy.
| SELECTED STOCK-MARKET MEASURES (Ranked in Order from 12/31) | |||||
| 07/08 Close | 06/30 Close | 12/31/2003 Close | To 07/08 From | ||
| 06/30 | 12/31 | ||||
| Russ. 2000 | 561 | 592 | 557 | -5.2% | +0.7% |
| NYSE Comp. | 6474 | 6603 | 6464 | -2.0% | +0.2% |
| Wil. 5000 | 10808 | 11139 | 10800 | -3.0% | +0.1% |
| S&P 500 | 1109 | 1141 | 1112 | -2.8% | -0.3% |
| Value Line | 360 | 377 | 363 | -4.5% | -0.8% |
| NASDAQ 100 | 1431 | 1517 | 1468 | -5.7% | -2.5% |
| DJIA | 10172 | 10435 | 10454 | -2.5% | -2.7% |
| Average | -3.7% | -0.8% | |||
| Median | -3.0% | -0.3% | |||
As the above numbers indicate, the tracking group has fallen an average 3.7% during this month's first five trading days, with declines running in a rather wide range of 2.0% for the NYSE Composite, to 5.7% for the NASDAQ 100. These losses have been sufficient to push four of the seven components into negative territory for the year, and it would not take much additional price erosion to move the three positive components into the loss column.
| SELECTED STOCK-MARKET MEASURES | ||||
| 07/08 Close | Recent Highs | Highs to 07/08 | ||
| Close | Date | |||
| NYSE Comp. | 6474 | 6780 | 03/05 | -4.5% |
| Wil. 5000 | 10808 | 11314 | 03/05 | -4.5% |
| S&P 500 | 1109 | 1158 | 02/11 | -5.3% |
| DJIA | 10172 | 10738 | 02/11 | -5.3% |
| Value Line | 360 | 387 | 04/05 | -7.0% |
| Russ. 2000 | 561 | 606 | 04/05 | -7.4% |
| NASDAQ 100 | 1431 | 1554 | 01/26 | -7.9% |
| Average | -5.8% | |||
| Median | -5.3% | |||
I believe the above numbers reveal a couple things of import:
(1) The market's recent slide has resulted in a reasonably large and growing gap between yesterday's closes and respective 52-week highs.
(2) The 52-week highs are becoming more and more distant. Even the most recent ones -- the Value Line and the Russell 2000 -- were set over three months ago.
Bulls will argue that the general flatness of the market between when these highs were established and, say, the end of June, represented a major base. My interpretation is quite different. I've felt for months the market was in the process of making a significant distribution top. I have not changed my thinking! But this is why what the equity market does over the coming few weeks is so critical. The outcome should determine which interpretation was correct.
In the Really Short-Term Trenches
In this regard, bulls and bears alike are on the immediate brink of a potential agony-ecstacy event. As the next table indicates, the DJIA finished yesterday ever so slightly below its 200-day moving average. The S&P 500 closed just above its. Therefore, we are about to get an imminent test of technically critical levels.
Of course, the NASDAQ composite now stands a couple percent below its 200-day moving average, something I interpret as a negative portent with regard to the Dow and the S&P's success in launching and sustaining a major rally from current levels. And "sustaining" is the key word here. There is another possibility, of course, to wit: the Dow and the S&P hesitate a little around this area -- or maybe don't hesitate a little -- and simply blow with gusto right through the 200-day averages. We could find out a good deal today about whether this is going to be the outcome.
| DJIA, NASDAQ COMPOSITE AND S&P 500 CLOSING PRICES ON SELECTED DATES VERSUS RESPECTIVE 20-DAY, 50-DAY AND 200-DAY MOVING AVERAGES (In Percent or Portion Thereof) | |||||||||
| Date | DJIA Vs. | NAZ Comp. Vs. | S&P 500 Vs. | ||||||
| 20D | 50D | 200D | 20D | 50D | 200D | 20D | 50D | 200D | |
| 2004 | |||||||||
| 07/08 | -2 | -<1 | -<1 | -3 | -2 | -2 | -2 | -<1 | <1 |
| ================================================ | |||||||||
| 06/11 | 3 | 1 | 3 | 2 | 1 | 1 | 2 | 1 | 4 |
| 05/21 | -2 | -3 | -1 | -1 | -3 | -2 | -1 | -2 | <1 |
| 05/14 | -2 | -3 | -<1 | -3 | -4 | -3 | -2 | -2 | 1 |
| 05/07 | -2 | -2 | <1 | -4 | -4 | -2 | -2 | -3 | 2 |
| -------------------------------------------------------------------------------------- | |||||||||
| 04/30 | -2 | -2 | 2 | -5 | -4 | -1 | -2 | -2 | 3 |
| 04/02 | 2 | <1 | 6 | 4 | 2 | 8 | 2 | <1 | 7 |
| -------------------------------------------------------------------------------------- | |||||||||
| 02/20 | <1 | 1 | 10 | -1 | -<1 | 10 | <1 | 2 | 10 |
| 02/13 | <1 | 2 | 11 | -1 | <1 | 12 | <1 | 3 | 11 |
| 02/06 | <1 | 2 | 11 | -2 | 2 | 13 | <1 | 3 | 11 |
| 01/30 | -<1 | 3 | 11 | -2 | 3 | 15 | -<1 | 3 | 11 |
| 01/23 | <1 | 4 | 12 | 2 | 6 | 18 | 1 | 5 | 12 |
| 01/16 | 1 | 5 | 13 | 5 | 8 | 20 | 2 | 5 | 13 |
| 01/09 | 1 | 4 | 12 | 4 | 6 | 19 | 2 | 4 | 12 |
| 01/02 | 2 | 5 | 12 | 1 | 2 | 14 | 2 | 4 | 10 |
The three general periods delineated above tell an interesting story, too, one that helps paint more of a picture of a distribution top than of a long consolidation/basing period.
Note that during the January through February period, these three market measures' 200-day moving averages achieved their maximum apogee. The April period illustrates the atrophy that took place after the late January through mid February momentum peak. Then comes the decline in which the NASDAQ composite violated its 200-day average, but in which the Dow and the S&P were successful in holding, then rallying off, theirs.
But the ensuing rally into roughly mid June left all three measures well below prior peaks. Now we are back to finding out whether what is at hand is merely another successful retest of the 200-day bogey, or whether it becomes something worse. I continue to opt for the latter as the probable resolution.
Other Influences
Some of what occurs near term in stocks will surely be affected by the behavior in other markets. And in this regard, yesterday's $40+ close in crude oil, multi-month low in the Dollar Index, accompanied by a multi-month high in physical gold were not encouraging.
And if the recent strength in the XAU is leading bullion, it would suggest that, on balance, physical gold is going to sustain its recent upward momentum. On 6/24, which was not very long ago, the XAU closed at 80.79, versus yesterday's finish of 91.34. A more than 13% gain over this time frame is not at all shabby.
Of course, given the trading patterns of past months, sustained strength in gold suggests additional exchange-rate weakness in the dollar. In turn, this suggests the possibility that open-market interest rates are about ready to start climbing again.
None of this would be terribly helpful to the well-being of the equity market!
