A Look At The Upcoming First Week of June

Go away for a couple of weeks on vacation, and what do you know - the market does, more or less, what I expected it to.....

Here's our old buddy the SPX again.....


The bottom of the channel got pushed down, but the confirmation level never violated. By the way, we DID get a new "break level" right near 1500 though on the bottom end, which makes things more and more interesting as time goes on.

More important, perhaps, is this chart:


Note the HUGE push upward Friday as treasuries sold off, finishing quite close to the psychological 5.0 level. The 4.80 level, however, remains the one to watch, as it has presaged (accurately) moves downward since the Fed got done playing around. And above (solidly) we are, for about two weeks now.

If patterns hold this means we have about another week or two before the market breaks down.

On a technical level the bond isn't anywhere near done yet. Stochastics are showing continued great strength with a solid BUY and MACD continues strong. The only fly in the ointment is that relative strength is solidly in the "overbought" category (in this case, oversold on price) - but that can continue for quite some time, as we've seen with the Dow!

In terms of MACD we are approaching the peak before the February plunge and above the level before last summer's selloff. The peak last summer was right near 5.25%, but the selloff was well under way by that point. It will be interesting to see how the pattern plays out this time - and whether history repeats.

So on a purely technical level I see bonds continuing to advance in yield in the short term; they are also trading in a channel that has held since mid-October; a breakout above that channel (which I show in the chart) would be a true "oh crap!" moment, as it would indicate that real borrowing costs may threaten the levels of last summer. Note, however, that we have now been above 4.80 long enough that even a pullback below, unless it is decisively below, is unlikely to prevent the coming market correction.

Short term indicators on the SPX are not all that positive. While the advance looked solid in terms of internals on Friday, looking at the Stochastics and MACD it wasn't all that impressive. RSI looked good though as did my proprietary indicator.

From an economic perspective the coming week is likely to be dominated by the service sector report, due out Tuesday. I'm not impressed with the jobs report - take out the "black box" and growth was anemic, albeit positive - a good change from last month when it was actually negative without the "fudge factors."

Retail sales are due out Thursday for big chain stores, and I expect the numbers to be modest. Of course a negative surprise there is likely to get ugly fast - but I still think we're a week early on that, or perhaps two - so I wouldn't bet the farm on it. Consumer spending was reported up but wages down - that won't continue for long, obviously. Of course the market ignored it.

Oh, and on inflation - anyone notice the price of a gallon of milk lately? 2.5% a year inflation eh? Yeah, pull the other one.

On the GDP, my "guess" was actually optimistic. I said revised numbers would be at 0.75% - it was actually 0.6! That's damn near zero. Will it pick up in 2Q? We'll see - but again, if we get big revisions, then the "headline" number won't matter a bit - except to psychology, of course.

Pending home sales came in like crap, as I expected. Of course the NAR tried to spin it - with some success.

One more item of note - nearly half the companies that have gone public this year have not been profitable. That's the highest number since....... 1999. Hmmmm.....

There was a ton of mortgage-related news in the last week, with the most interesting being a note about the risk of foreclosure for ARMs - one in three if you have an ARM from 2004 to 2006 with a teaser rate of less than 4%! That's a little ditty that was widely ignored....

I'm back at the usual and will be watching things with far more zeal in the coming week. I believe we have to be very careful here, as we may have only another week - or perhaps two - before a major turn occurs, and it may come without much if any warning. We came very close to a signal on Wednesday on The Canary, but avoided it - and I also saw with interest that our markets totally ignored the one-day wonder activity in China late last week. This "de-coupling", if it is occurring, is actually quite ominous in terms of predictive possibilities, as it may make it much harder to spot the markers before the turn occurs here.

More as I see it during the coming week - have a profitable morning!