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This Market Still Has Issues



Every once in a while we get some reminders that not all is perfect in the workings of the market. Over the past couple of months there has been significant upside in the market due to the belief that most of the market's major issues have been dealt with accordingly.

While that is generally the case, a few "issues" have reemerged over the past couple of days, which may have an effect on equities over coming sessions. All of this combined suggests more rotation than huge upside or downside from current levels.

Pre-announcement season: FedEx (FDX:NYSE) guided lower on earnings for the quarter and the year because of the sluggish economy. This is important because many use FDX as a guide for economic activity on the theory that if there is an increase in purchasing, a pickup in shipping should quickly follow. The sluggish activity and negative guidance comes despite the end of the War and 45-year low in interest rates. The lack of improvement is clearly going to cause concern that other companies may guide lower in coming days and weeks.

Corporate governance: Last night IBM (IBM:NYSE) disclosed the Securities and Exchange Commission is seeking information relating to revenue recognition in 2000 and 2001 primarily concerning certain types of customer transactions. I very much doubt that this news is the beginning of an onslaught of new corporate shenanigans, but it is a reminder the news items can come out of nowhere, especially given the mandate of the SEC.

Market Direction: Yesterday's late-day market reversal served as evidence that nothing grows straight to the sky. Over the past two months, it has felt like anytime the market was strong during the day that it closed that way. Yesterday was the first day in a long time where there was an actual reversal. There were a number of rumors that apparently sparked the reversal, but that can only happen when buyers have been temporarily exhausted.

Again, I do believe it would be a mistake to look at these three factors and suggest that the market is about to "crack," "tank," "plunge" or any other word used to describe a decline. What the above items do point out is that the market's underlying issues don't go away just because stocks are acting very well.

As I hopefully was able to explain on Friday, very positive and negative cases could be made about the market at current levels, and as a result, I chose to focus on potential rotation vs. timing the market.

If I were to show you a daily chart of the market and many of its components, you could say nothing negative about the price action other than that it has caused an extreme overbought condition.

The daily picture has some licking their chops...


That isn't necessarily a big deal because it has been overbought in the last month, obviously without any tragic results. Then when you turn to the weekly view, it doesn't look so strong. Although the market appears to have broken above its downtrend, that in itself should be confirmed by more than one period's action (on a weekly chart -- 1 week) and would only change the trend from negative to neutral.

...While the weekly picture has some licking their wounds.

Source: Baseline

In addition, despite being up more than 20%, which is some people's definition of a bull market, the S&P 500 is a far cry from making a higher high. I define a bull market as seeing a clear set of higher highs and higher lows. Even if I were data mining, I don't see that in the weekly SPX chart.

Again, it seems that I am doing a fair amount of hedging here and that is because I can see both sides of the argument. In my view that means violent rotation is likely to be the next big story.

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No positions in stocks mentioned.
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