The Week Ahead: More Signs the Economy is Improving
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.