The markets are setting up for a showdown. Simply put, volume has been muted of late but may change shortly. The market awaits further European information on how bad the Greece crisis continues to be and in reality, who is next? The markets seem to be sweeping it under the carpet, but everyone knows Greece was just the first of many to come. For now, the markets are content to ignore it.
Volume indicates lack of institutional involvement. Over the last six weeks, since the February 5th pivot low, the markets have soared to new 52 week highs. However, there is no sign of major institutional buying. If there was, volume would be much higher. Speculation is rampant that deals have been struck with the government to keep institutional selling to a minimum to hold the markets higher. We continue to see bad news pushed under the carpet and good news pumped. Whether you believe in the shady activities, one thing is for certain, the markets never go straight up or straight down. Even the best of manipulators can only keep it in one direction so long.
Next week promises to be a little more volatile than last. It seemed like the markets were held in check for the majority of the week due to options expiration and lack of economic news. In addition, the market was waiting on the healthcare vote. I do not think the healthcare issue is as big of a deal as many believe for the markets. Monday will be pure and simple the healthcare issue. No economic news to speak of will be released. There are continued rumblings between the U.S. and China as well on trade practices which also need to be watched. Starting Tuesday, be alerted to economic and earnings news. One the economic front, watch for housing data. Existing Home Sales and FHFA Home Price Index will be released at 10:00am ET. Wednesday will see Durable Goods orders, New Home Sales and Crude Inventories. On Thursday, the market gets Initial Jobless Claims and Continuing Claims and on Friday, the final revisions to GDP and Michigan Sentiment will be released.
Notable earnings this week include Adobe Systems Incorporated (NASDAQ:ADBE), KB Home (NYSE:KBH), Best Buy Co., Inc. (NYSE:BBY) and Oracle Corporation (NASDAQ:ORCL). These will all have a decent impact on the markets. ADBE and ORCL are both key technology companies while KBH will give the markets a look into the housing market. BBY will obviously play a role with the retailers.
Fundamentally and technically the markets are near term overbought. However, as I mentioned earlier, light volume and possible propping, shady activity seems to keep it that way. Thursday an in spirit of bear flag formed into the close and Friday it did play out. In addition, a new bear flag formation formed into the close on Friday. While the bear flag formation is solid, Monday is expected to be relatively light in volume and that can negate the pattern.
Want to know if the markets will be up or down on Monday with out even looking at the indexes? Focus on the SPDR S&P 500 ETF (NYSE:SPY). If the SPY does more than 200 million in volume, markets should be lower. Less than 200 million, look for flat to higher. Is it really this simple? Yes! Why? Because volume dictates institutional activity and reality. Reality is the markets are overbought. Monday through Thursday the markets were flat to higher, volume never went near 200 million on the SPY. Friday, volume was over 200 million and the markets were lower. This is a great signal.
Chief Market Strategist