The market internals had continued to deteriorate since the A/D line formed a negative divergence in May. This made a market decline inevitable and the global fears lit the fuse over the weekend. Of course Greece has been a concern for many years as the past Greece debt triggered market declines have created some excellent buying opportunities.
The decline in May 2012 ended in early June as the market internals completed classic bottoming formations (Rally Potential That Bears Don’t Expect). Since there are no signs of a recession this market decline should also create a good buying opportunity, but how can you tell when to start buying?
I think that in addition to the market internals it will be important to keep an eye on the overseas markets. In particular I am watching the German Dax which has next good support in the 10,800 area. This is 2% below current levels . If this level is broken there is more important support in the 10,300-10,400 area.
One should also keep an eye on the sentiment as the 10% increase in AAII bullish sentiment last week I thought last week was a worrisome sign. Another market indicator I am watching is the number of stocks above their 50 day MAs as I will be looking for it to reach critically oversold levels like it did last October.
Let’s look at the three key technical signs that will help you identify the next good buying opportunity.
The daily chart of the NYSE Composite shows the plunge through support, line a, going back to the December 2014 lows.
- The close was well below the daily starc- band with next chart support at 10,650, line b.
- The weekly starc- band is at 10,587 with July’s pivot support at 10,532.
- The NYSE A/D line formed a negative divergence, line c, in May that was confirmed by the break below the early May lows.
- This downtrend needs to be broken to confirm that the correction is over and I am also watching the short term resistance ( point 1).
- The lower lows in the A/D line (see arrow) are also consistent with a further decline.
- The ARMs Index closed at 2.14 which is just moderately oversold. It is well below the peaks in January (3.61) and March (2.64)
- The 20 day EMA is now at 11,000.
The Spyder Trust (SPY) also closed well below its daily starc- band as it reached next support in $205.50 area.
- The weekly starc- band is at $203.27 with the March low at $202.50, line d.
- There is additional support in the $200.00 area with the July pivot support currently at $200.54
- A drop to this level would mean a decline of 2.4% from current levels.
- The S&P 500 A/D line dropped below the June lows on Monday.
- It shows a well established downtrend, line f, which I will be watching closely.
- The next long term support for the A/D line is at the December-January lows, line g.
- The McClellan oscillator (not shown) closed at -280 which is an oversold reading.
- The OBV has been in a well established downtrend for most of the year, line h.
- The volume Monday was the heaviest since March 18th.
- The declining 20 day EMA is at $209.67 and any rebounds over the near term are likely to fail below this level.
What to Do? Be patience if you are looking to get in the market or want to add to your long term stock portfolio. In my opinion the long term trend for the stock market is still positive as there are no signs on the horizon that the economy is close to a recession. In fact it appears to be getting stronger.
The Pending Home Sales were strong Monday with S&P Case-Shiller HPI, Chicago PMI and Consumer Confidence are all being released on Tuesday.
Three reasons to be patient
- Wait for clear signs from the A/D lines that the correction is over
- AAII bullish% now at 35.6% needs to drop to the low 20% area
- The percentage of S&P 500 stocks above their 50 day MA needs to turn up from the 20-25% level
The Week Ahead: Will “Bubbleland” Fears Trigger Heavier Selling?
The 8% drop Friday in Shanghai Composite set the tone for many of the markets on Friday though some were able to buck the trend. The Shanghai is now down over 20% from the high just made earlier this month. With just a few days left in the quarter many opinions are being voiced on where the market will be going in July and in the 3rd quarter.
The sentiment was quite a bit different in two of the other key global markets even though the ups and down in Greece’s debt negotiations did cause an increase in volatility. The German Dax Index did not seem troubled over a possible default by Greece as it closed the week up almost 4%. The Nikkei 225 also continues to act strong as it made a new multi-year high last week gaining 2.6%
Carl Icahn closed out his large wining position in Netflix (NFLX) for a reported $2 billion profit and then commented that the “market was extremely overheated”. This was followed by comments later in the week by well known investor Jeremy Grantham who said that ” most stock markets in the world are overpriced — and the bond market is more overpriced that at any time in history”.
Though he does not think either market is in “bubbleland territory” yet he does think they are eventually headed that way because of Federal Reserve policy. For the first time since 2013 it has been a down quarter for most bond holders and US Treasuries are slightly negative for the year.
Despite the relatively sharp rise in yields and the decline in price most bond fund managers do not seem to be worried at this time. (Treasurys’ Swoon Doesn’t Rattle Debt Investors) From a technical perspective I think one can make a case that they might be wrong .
The weekly chart of the 10-Year T-Note shows that the downtrend from the early 2014 high, line a, was broken on June 3rd. Yields have continued to move higher with next key resistance at 2.563%, line b. A close above last September’s high yield of 2.64% would really get the market’s attention. It would take a drop below the 2.09% area (point 1) to reverse the uptrend.
I have always thought that bond investors should always look at income investments technically as well as fundamentally. My fear is that many bond fund holders are not prepared to see a capital loss in their fund that is greater than the yield they were counting on when they bought the fund.
The Vanguard Total Bond Market Index (VBMF) is one of the largest bond mutual funds with total assets of $145.2 billion. It has a current yield of 2.34%. It is now down 0.53% for the year and 2.04% for the past three months.
The weekly chart shows that the uptrend, line c, was broken in the middle of May. On the long term chart one can make the case that the high in late 2014 was the right shoulder (RS) of a head & shoulder top. This would be confirmed by a weekly close well under the neckline (line d) at $10.49. The measured target from the formation is in the $9.80 area which is over 8% below current levels.
Some investors have already given up on the bond market as up through June 17th $6.6 billion has come out of bond funds and ETFs so far this month. Lipper also reports that $16 billion has gone into stock funds and ETFs.
This influx of cash has not done much to move the stock market so far and as I mentioned last week “More Signs The Economy Is Improving” the market needed a higher close this week to avoid further deterioration in the weekly studies. The individual investor has turned more bullish in the past week as it jumped 10% as 35.6% are now bullish. The bearish % saw even a larger swing as it dropped over 12% as only 21.7% are now bearish. (Look for closing US stock market coverage in the Market Wrap section)
The higher yields did cause the dollar to turn higher last week as the September Dollar Index was up over 2.5%. It closed above the prior week’s highs but the weekly studies need a further rally before they will turn positive. A stronger dollar is not going to help either the gold or crude oil market which are both looking weaker technically.
The Comex Gold futures were down $27.80 last week and closed just above week’s low. A break of the support in the $1150 area, line a, would not be surprising. The volume on the recent rally was light as the OBV just rebounded back to its declining WMA. The OBV is well below its downtrend, line b. The Herrick Payoff Index (HPI) broke its uptrend (line c) in late May and is also below its WMA. It is still showing positive but deteriorating money flow.
Crude oil has been in a tight range for the past eight weeks which suggests the rebound from the spring lows has lost upside momentum. A drop in the September crude oil contract below $57 should trigger some heavier selling with next support in the $ 54 area. The OBV has turned a bit lower but is still above its WMA. The HPI has formed lower highs and is on the verge of breaking its uptrend. The daily studies (not shown) do look more negative.
The data on manufacturing last week was mixed as as the Dallas Fed National Activity Index and Richmond Fed Manufacturing Index were a bit better than expected. The Durable Goods and the PMI flash reading on the Manufacturing Index did come in weaker than expected. Late in the week the Kansas City Fed Manufacturing Index was a bit better than expected but overall was still weak.
On the housing front the Existing Home Sales hit their highest level since 2013 as they were up 5.1% in May. This is despite a slight uptick in the mortgage rate over the past month. The New Home Sales were also quite strong as they rose 2.2% which was well above the consensus estimates.
There was good news on the consumer last week as Consumer spending rose 0.9% in May which was the best reading since August 2009. Economists are hoping that the better job market along with lower gas prices will spur even more spending in the months ahead. Friday’s 98.1 reading from the University of Michigan’s Consumer Sentiment also reflects a high degree of optimism which should be a plus for consumer spending in the months ahead.
In this holiday shortened week there is plenty of economic data starting with the Pending Home Sales Index and the Dallas National Fed Manufacturing Survey on Monday. Also we have the Chicago PMI (Tuesday) as well as the PMI Manufacturing Index and ISM Manufacturing Index on Wednesday.
On Wednesday we also get the ADP Employment Report and Construction Spending then on Thursday we get the monthly jobs report as well as Factory Orders. The markets are closed on Friday but the banks are open.
Of the eleven sector or market ETFs that are included in the weekly table five are negative for the year and six are higher led by heath care which has been the leader all year. It is now up over 11% for the year. It was acting a bit sluggish in the middle of the month but then broke out to the upside on June 19th.
The second best performer is the Consumer Discretionary Select Sector (XLY) as it closed at a new high Friday. It is up almost 8% for the year much better than the 2% gain in the Spyder Trust (SPY). The weekly starc+ band is at $82.35 with initial weekly support at $73.75. There is more important support at $68.39 and the 20 week EMA.
The relative performance made a new high last week as XLY has continued to lead the S&P 500 higher. The RS line broke through resistance, line a, early in the year. The OBV broke through its resistance, line b, late last year and is above its WMA. It did not make a new high last week.
The weakest sectors include utilities, transportation stocks, energy and industrials. Of course the transportation stocks are part of the industrial sector. The monthly and weekly technical studies on all of these sector ETFs is negative (see table).
\On Friday I released a monthly chart of the Energy Select Sector (XLE) which is in danger of having a very weak monthly close which is consistent with my analysis of crude oil.
The major averages closed mixed on Friday as the Dow Industrials were higher boosted by a sharp gain in Nike, Inc (NKE). The Dow Utilities and Transports were also higher Friday but all were lower for the week. For the week the S&P 500 was down just 0.40%.
For the NYSE more stocks declined than advanced with only 88 stocks making new highs and 202 stocks making new 52 week lows. The market internals over the past few weeks have deteriorated and they turned more negative this week.
For the Spyder Trust (SPY) the preliminary 3rd quarter pivot is at $208.72 and a weekly close below this level would be consistent with a further decline. There is stronger weekly support at $206.68 with the weekly starc- band at $204.22. The March low at $202.51 which is 3.5% below Friday’s low.
The S&P 500 A/D line dropped below its WMA on June 5th, then tested its flattening WMA last week and looks ready to close even lower this week. This consistent with a more serious 6-10% correction as the A/D line has longer term support now at line a. The weekly OBV is still above its WMA but did turn lower this week. The monthly OBV (not shown) has not confirmed the recent highs.
The small cap iShares Russell 2000 (IWM) continues to be the best of the major averages as it is up 7.2% YTD though it also closed lower for the week. The high last week just tested the upper boundary (line a) of what may be a potentially negative rising wedge formation.
The lower boundary of the wedge is now in the $124.40 area with the rising 20 week EMA at $123.63. The six week lows are at $122.52 with the preliminary quarterly support at $122.13. The Russell 2000 A/D line failed to make a new high with prices over the past several weeks, line c. The A/D line is still above its WMA with important support at the late May lows. The weekly OBV did confirm the price action and is well above the support at line d.
The further deterioration in the weekly studies combined with the still negative readings from teh daily studies turns the focus on the downside over the next few weeks or possibly even into August.
There are no signs that a deeper correction is the start of a new bear market or a recession as I continue to expect the economy to improve this summer. Therefore a correction should be a buying opportunity for those who want to stay in stocks until there is clear evidence that the bull market has topped out and a recession is imminent.
My advice is to keep a only keep level of commitment to the stock market that will not make you change your strategy if we do some panic selling. The early evidence suggests that the small caps and health care will continue to be the leaders once the correction is over.
Because of the 4th of July holiday there only be a brief update next Friday.
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Optimism over a solution to Greece’s debt deal helped push global markets higher Monday. In the US most of the major averages did close well below the day’s highs. Several of the market tracking ETFs, including the Spyder Trust (SPY) and PowerShares QQQ Trust (QQQ) both formed dojis which is a sign of indecision.
Monday’s rally has caused further improvement in the daily technical studies but they have still not reached levels that are consistent with the end of the market’s correction. The market internals were positive as the McClellan oscillator has risen further to +35 but is still well below the early April highs.
The 5.1% increase in Existing Home Sales last month also encouraged stock investors and as I discussed in Friday’s “More Signs The Economy Is Improving” there is a full economic calendar this week . I am looking for more signs this summer that the economy is strong and that those not in the stock market should be buying on weakness.
The airline stocks have been hit hard in 2015 as the S&P 1500 Airline Index is down just over 12%. Last week’s cover story in Barron’s ( “Airline Stocks Could Soar Up to 50%” ) made the case for several of the airline stocks.
These stocks rallied on Monday but are there any signs that the group is once again going to lead the market like it did in 2014?
Chart Analysis: The weekly chart of the S&P 1500 Airline Index peaked in late January and by March 20th there were signs that the group had topped out.
- The index tested the support in the 288-290 area, line a, which corresponded to last summer’s high.
- The monthly pivot support is at 271 with the weekly starc- band at 267.
- The relative performance turned positive in October 2013 (see arrow)
- By last October the RS line was in a solid uptrend, line d, that was broken in May.
- This was after the RS line had formed lower highs, line c.
- A move in the relative performance above this resistance and the WMA are needed to signal that the group is leading the S&P 500.
- The still declining 20 week EMA is now at 327.
JetBlue Airways (JBLU) was one of Monday’s leaders up 4.8% and it is the best performing US airline this year as it is up 33.7% YTD.
- Just three weeks ago JBLU dropped below its 20 week EMA as it hit a low of $18.33 before turning higher.
- JBLU closed at its daily starc+ band on Monday with the weekly at $23.16.
- Using current data the 3rd quarter pivot resistance is tentatively at $24.72.
- The weekly RS line has moved back above its rising WMA consistent with a market leader.
- The weekly on-balance-volume is on the verge of moving back above its WMA and is also well above the long term support at line g.
- The 20 day EMA is at $20.06 with further support in the $19.40-$19.60 area.
What To Do: There are no signs, basis the weekly or daily relative performance, that the airline group has completed its correction. One more drop back to the recent lows could complete a bottom formation.
JetBlue Airways (JBLU) has likely completed its correction unlike some of the other high flyiing airlines like Southwest Airlines (LUV) which was mentioned in the Barron’s article. Of the other three stocks, Delta Air Lines (DAL) has the best chart.
The market’s positive reaction to the FOMC announcement gave the bulls some relief after stocks started off the week by gapping lower last Monday. The powerful rally on Thursday took the major averages above the recent swing highs and likely stopped out some on the short side.
The % of both bullish and bearish individual investors rose last week as the bullish% jumped 5.4% to 25.4% which is still well below the long term average of 38.8%. As I noted last week the last week of June is normally weak seasonally while stocks typically do better the first few weeks of July.
Since the last earning’s season money managers and investors have been concerned that the economy was not strong enough to justify expectations for higher stock prices. Several of last week’s economic reports came in better than expected which is a reason those not in the market should be thinking about buying stocks on a decline back toward the recent lows
After the disappointing Empire Manufacturing Survey and Industrial Production the news got better for the economy. Though Housing Starts were down 11.1% from April that does not give one the whole picture. In April, they were up over 22% and building permits are the best since 2007. This will cause some upward revisions in the 2nd Quarter GDP as the final reading for the 1st quarter GDP is out on Wednesday.
Also last week The all important Leading Economic Indicators came in better than expected as it was up 0.7%. This is a sure sign that the economy is really in fine shape with no signs of a recession on the horizon. Also last Thursday we had the very strong 15.2 reading for the Philadelphia Fed Survey which is the best news the manufacturing sector has had for some time. The chart shows that it had peaked in late 2014.
It is important that we see further growth in unfilled orders and shipments that was reflected in the Philly survey. On Monday we get the Dallas Fed National Activity Index followed on Tuesday by the Durable Goods and the PMI flash reading on the Manufacturing Index. Also Tuesday we get the Richmond Fed Manufacturing Index.
Strong numbers should help boost the beaten down industrial stocks which have done poorly so far in 2015. There is also plenty of housing data this week including Existing home Sales (Monday) and the New Home Sales (Tuesday). Some of the home building stocks are looking better technically suggesting that it may be a better summer for these stocks.
As I discussed in last week’s ” 3 Key Trends For Your Summer Investing” there has been some deterioration in the weekly technical studies since early June. The major averages closed near the day’s lows on Friday as the S&P 500 settled at 2109.76 on Friday after hitting had a high on Thursday of 2126.65.
Still the S&P 500 was up 0.8% for the week which was its best performance since the end of April. The Dow Industrials finished up 0.65% for the week while the small cap Russell 2000 was up 1.55%. The higher weekly close has helped to stabilize the weekly technical studies as more stocks advanced than those declined.
The daily chart of the Spyder Trust (SPY) still shows a broad trading range, lines a and b, which represents the choppy action of the past three months. The 20 day EMA is at $209.66 and a drop below $208.35 will return the focus on the downside. There is stronger support now in the $205-$206.68 area.
The daily technical studies, as I noted early Wednesday. are still negative as they will take some time and strong price action to indicate that the correction is over. The S&P 500 A/D line turned down Friday after popping above its WMA on Thursday’s strong rally. The lower lows in the A/D line, line d, are not consistent with the formation of a bottom. The daily OBV is still in a long term downtrend, line e.
The PowerShares QQQ Trust (QQQ) was up 1.28% as it has held above the 20 week EMA for the past fifteen weeks. The weekly resistance is in the $113-$114 area with the quarterly pivot resistance at $114.41. There is initial weekly support at $106.95 with further at $105.76.
The weekly Nasdaq 100 A/D line broke its uptrend, line h, in early June and is now trying to move back above its WMA. On a longer term basis the A/D line has formed higher highs which is a bullish sign for the overall trend. The weekly OBV turned up but is still below its WMA and the resistance at line i.
The weekly chart of the iShares Russell 2000 (IWEM) clearly looks the strongest as IWM closed well above the April highs last week. The weekly starc+ band is at $131.63 with the quarterly projected pivot resistance at $133.48. The 20 day EMA represents short term support at $125.65 with the 20 week EMA at $123.22.
The strong rally in the relative performance confirms that it is still a market leader from late last year when the downtrend. The weekly OBV broke through resistance in March and made another new high last week, confirming prices.
A much stronger rally is needed this week to suggest that the market’s correction is over.
Interest Rates & Commodities
The yield on the 10 Year T-Note dropped last week after closing above 2.40% two weeks ago. The downtrend line a, was broken in May as yields just moved up to the Fibonacci zone of resistance at 2.342% (50%) and 2.505% (61.8%). Yields could drop back to the 2.20% to 2.15% area and a weekly close back below 2.00% will suggest a decline back to the year’s lows.
Crude oil prices were flat for the week but were down almost a $1 on Friday. Over the past six weeks crude has been in a trading range and a close below $56.80-$57 in the August contract would imply a decline back to the $53-$54 area. The weekly money flow on crude oil is still positive.
The dollar index dropped back to the May lows last week and a strong close back above the $96 level is needed to suggest that it is completing a double bottom. The weaker dollar helped the SPDR Gold Trust (GLD) as it was up 1.7% for the week. The weekly OBV for GLD (not shown) is above its WMA but further price gains are needed to indicate that GLD has bottomed. We are entering a seasonally strong period for gold.
The daily outlook for the stock market does allow for a further correction this week but a strong weekly close will set the stage for a good rally as we head into July. The earning season gets underway after the 4th of July holiday. Overall the market is now fairly oversold basis the % of S&P 500 stocks above their 50 day MAs.
On Friday the 5 day MA of the % had turned up to 44.18% At last week’s lows it was 1.5 standard deviations below the mean of 61.39%. Declines below 40% often coincide with good buying opportunities. The MA dropped to a low of 18% as the stock market was bottoming in October of 2014. At market tops the % will often rise above 80% which is a sign that the market is in a high risk buy area.
Stock still look like the best bet for the last half of the year as while bond prices may rise over the short term as yields drop, they are likely to be lower by the end of the year. There has been some improvement in the outlook for the precious metals there are no clear buy signals yet.
Stocks put in a solid performance on Tuesday with the S&P 500 up 0.57% as advancing stocks led the decliners by almost a 2-1 margin. The DAX Index was also higher by the close but it has given up those gains in early Wednesday trading. The Dow Transports were lower again as they lost another 0.33%.
The rally has caused some short term improvement in the daily technical studies as discussed below. The futures are showing solid gains as the market waits for this afternoons FOMC announcement. The debate over when the Fed might raise rates has been moving the markets for the past year and often stocks have rallied sharply after past FOMC announcements.
This may also be the case today as this week’s economic data has been mixed. The Empire State Manufacturing Survey along with Industrial Production were weaker than expected but the Housing Market Index beat expectations. On Thursday we get the all important Leading Economic Indicators which continues to signal an improving economy.
So what should you be watching as stocks once again try to move higher?
Chart Analysis: The broadly based NYSE Composite again tested support at line a, on Monday before Tuesday’s higher close.
- The declining 20 day EMA is at 11,049 with the daily starc+ band at 11,174.
- The major resistance still lies in the 11,250 area with monthly pivot resistance at 11,384.
- The NYSE A/D line did not make a new high with prices on May 21st, line b.
- This divergence was confirmed by the drop below the April lows.
- The A/D line is now trying to bottom out (line c) but the declining WMA suggests a failing rally.
- The McClellan oscillator has formed significantly higher lows (line e) and could rally back to resistance at line d.
- A drop in the NYSE Composite below 10,882 would reassert the downtrend.
The low in the Spyder Trust (SPY) Monday was $207.79 which was not far above the monthly pivot support at $207.34.
- On recent lows the SPY has managed to close above the chart support at line f.
- A break of these lows will suggests a drop to the $204.50-$206 area.
- The S&P 500 A/D line made lower lows on Monday, line h, which is a sign of weakness.
- The break of support, line g, in early June turned the focus on the downside.
- A rally in the A/D line could test the former uptrend.
- The OBV has recently formed higher lows but the longer term downtrend, line f, is negative.
- The 20 day EMA is at $210.57 with last week’s high at $212.09.
- A move above this level should squeeze the shorts with the daily starc+ band at $213.58.
What it Means: It the market can close higher today after the FOMC announcement then the strength could continue through the end of the week. The quadruple witching on Friday will increase the volatility and may stall the rally. The daily indicators show no signs yet that the correction is over so lower prices are likely next week.