An Abrupt Rally Failure?

Daily State of the Markets 
Tuesday Morning – June 22, 2010  

If you had been out on the golf course yesterday and hadn’t seen the intraday action, you might be tempted to wave off a drop of 8 points on the Dow and assume that Monday was simply a session in which nothing much happened. However, from a technical perspective, nothing could be farther from the truth.

Chart watchers point out that three bad things occurred on the charts during Monday’s session. First and foremost, technicians note that the quick reversal of fortunes after the opening rally amounts to an “abrupt rally failure,” which, as the textbooks on technical analysis tell us, is never good. In addition, the indices put in what is called an “outside day.” This happens when both the intraday high and low exceeds the prior day’s highs and lows, and then the security in question closes below the low of the previous session (see a chart of the NASDAQ for a textbook example of this chart formation). And again, this does not usually lead to good things happening in the near term. Finally, the fact that the major indices appeared to first break to new-cycle highs and then reverse causes us to break out the term “breakout fakeout,” which again, doesn’t usually favor the bull camp.

Stocks blasted higher right out of the gate on Monday on the back of the news that China would remove the 21-month old peg to the U.S. dollar. However, skepticism regarding China’s true intentions along with the reality of the unintended consequences of the announcement that the Chinese were going to allow more flexibility in their currency regime caused traders to rethink the global celebration theme that had prevailed overnight in the foreign markets.

One of the biggest concerns we heard yesterday was regarding the potential for the Chinese to actually follow through on allowing the Yuan to appreciate. In short, the folks running China’s economy are often long on discussion and short on implementation. Thus, given the fact that the move was made less than a week before the G-20 Summit in Canada was to begin left many observers a tad skeptical about how much movement would actually occur in the Yuan.

In addition, while a stronger Yuan would be a positive for any and all companies/countries doing business in China by making Chinese imports less expensive, the simple fact of the matter is that the move also makes Chinese exports more expensive. As such, economists note the potential for the U.S. to “import inflation” if the Yuan is allowed to appreciate to any great degree (which is unlikely).

The other big concern voiced Monday was over sovereign debt. But this time, no one was talking about Greece, Portugal or any of the other PIGI’S. No, the worry is that a higher Yuan/lower dollar makes the debt of the good ol’ USofA more expensive. And since we are continuing to finance record deficits with mind boggling amounts of debt, well, you get the idea…

In sum, we’re of the mind that the bulls squandered their advantage on Monday and unless our heroes in horns can regroup quickly, the technicians are going to be talking about this being the third failed rally attempt since the top in April, which again, is not a good thing.

Turning to this morning… We don’t have any economic data to review this morning before the bell, but we will get a report from the Richmond Fed at 10:00 am eastern.

Finally, don’t forget, ego is the enemy…

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: -1.11%
  • Shanghai: +0.10%
  • Hong Kong: -0.45%
  • Japan: -1.22%
  • France: -1.09%
  • Germany: -0.84%
  • London: -1.55%

   

• Crude Oil Futures: – $1.09 to $76.73
• Gold: 1 $7.10 to $1233.60
• Dollar: Higher against Yen, Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 3.21%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +2
  • Dow Jones Industrial Average: -1
  • NASDAQ Composite: -1.5  

Wall Street Research Summary

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