The strong rally Monday gave the bulls some hope as some investors jumped into the most beaten down market sectors like the materials and industrials as the Materials Sector Select (XLB) and Industrials Sector Select (XLI) were up 2.4% and 2.1% respectively.
This came after last Wednesday’s sharp gains which caught even more traders by surprise, myself included. The further overnight weakening of the Chinese Yuan has pushed the Dow futures down over 100 points as the European markets are also down sharply as the Stoxx Europe 600 is down over 2% ahead of the US opening.
Though many are tempted to step in and buy some of the beaten down high yield large cap stocks one should remember that historically there are not many beaten down stocks that turn around quickly and start a new uptrend.
Just over a month ago the markets were focused more on Greece than the impact of China on the world markets but as I discussed in early July “Greece Isn’t The Real Problem” the breakdown in the technical outlook, especially the advance/decline lines was what investors should really be concerned with.
Therefore the rally in early July I felt should not be trusted and this is also true of the sharp rallies in the past week. The narrowly based nature of the Nasdaq 100’s new high on July 20th was a further warning to investors and presented new opportunities for traders.
One missing ingredient in the current market decline has been the lack of any panic selling but this may finally change this week. That does not mean that the market will immediately bottom out as the weekly and daily technical picture has to improve before a significant market bottom is complete. My longer term analysis continues to be positive for the market as it has been since the spring of 2009 with no signs of a bear market or a recession.
Let’s look at the charts
The Spyder Trust (SPY) is still holding above the 3rd quarter pivot at $207.38. A decisive break of this support would set the stage for a drop to the support in the $202-$203 area.
- There is initial resistance at Monday’s high of $210.67 and then in the $211.45 area.
- The daily starc+ band and major resistance is in the $213 area.
- The S&P 500 A/D line formed a slight negative divergence, line b, at the May highs.
- This resistance was tested in July as the SPY made a new high. This created a more pronounced bearish divergence.
- The A/D line now needs to move above its downtrend and the July high to signal that the correction is over.
- The OBV was strong in July but was still well below last December’s high. The OBV has now broken short term support.
The PiowerShares QQQ Trust (QQQ) has led the market higher in 2015 as it is up over 7% versus just 2.5% in the SPY.
- There is trend line support as well as the quarterly pivot at $107.43.
- If this level is broken there is additional support in the $104-$106 area
- The Nasdaq 100 A/D line moved slightly above its downtrend, line e, on Monday before reversing Tuesday.
- The A/D line was much weaker than prices at the July 20th high and this level (see arrow) needs to be overcome to signal that the correction in the QQQ is over.
- The on-balance volume (OBV) has dropped below the support, line g, that goes back to the January lows.
- The flat 20 day EMA is now at $111 with further resistance art $113.
The markets were waiting for the earnings from Alibaba Group (BABA) which reported before the opening Wednesday. The stock lost 3.9% on Tuesday and is down another 5.5% in pre-market trading as they missed badly on revenues.
- The technical outlook for BABA did not favor buying the stock ahead of its earnings as the last rally failed at the quarterly pivot at $85.03.
- The downtrend from the May highs, line a, is just below the starc+ band at $83.26.
- Before the opening BABA is trading below the July low at $76.21.
- The monthly projected pivot support and the weekly starc- band are in the $70-$71 area.
- The relative performance broke support in June and started a new downtrend.
- The RS line made another new low in July confirming that it was weaker than the S&P 500.
- The daily OBV dropped below its WMA in June and by the middle of the month its WMA was in a clear downtrend.
- The OBV has continued to make new lows forecasting new lows in price.
Cisco Systems (CSCO) reports after the close on Wednesday as it was down 2% in Tuesday’s trading. CSCO is up 2.94% YTD and the weekly chart shows a trading range over the past four weeks.
- CSCO is trying to hold above the quarterly pivot at $27.85.
- There is weekly chart support, line d, at $27 with the weekly starc- band at $26.17.
- This also corresponds to the monthly projected pivot support.
- The weekly relative performance broke its uptrend, line e, in May and by July had started a new downtrend.
- The rebound in the RS line to the declining WMA was a sign of weakness as it is now in a clear downtrend.
- The weekly OBV has dropped to its WMA but is acting stronger than prices. The daily OBV ( not shown) looks weaker.
- There is more important OBV support at line f.
What to do? Most traders and investors suffer from a lack of patience and those who got caught up in the two sharp rallies of the past week are likely regretting it. If you are not short already now is not the time to chase the short side of the market unless there is an oversold bounce
As I reviewed in Friday’s Week Ahead column I am watching some of the well diversified ETFs for future buying opportunities once the correction runs its course. If you are looking to buy I would be watching for stocks or ETFs that are acting stronger than the S&P 500. Be sure that before you become an aggressive buyer be sure there are clear signs that the correction is over.
I also post regular charts and commentary on both Twitter and StockTwits
The Week Ahead: Should You Trust Thus Rally?
The stock market finished the week on a positive note after a very wild week as the S&P futures had around a 35 point range every day of the week. They did manage to close the week just barely higher and the Dow Industrials closed the week up just 30 points . The Dow Transports beat out the S&P 500 on Friday as it was up 1.85% and gained 0.97% for the week.
Friday’s rally was spurred by the new proposal from Greece that encouraged traders that a deal was possible and as of Saturday morning the Greek parliament appears to have accepted a new debt plan. But of course until it is signed and delivered things could always change. The stock market was also quite encouraged by the 5.23% gain in the Shanghai Composite after three weeks of losses and several large daily swings.
Volatility was the key as the Market Volatility Index ($VIX) closed just below 20 last Thursday. this broke the downtrend, line a, from last October’s high. It reversed 16% on Friday and could now correct back to the breakout level. Such a sharp drop from this high a level is typically a short term positive but is this a rally you can trust?
To determine the market’s short and intermediate trend my favorite technical measure of the market’s health is the NYSE Advance/Decline line. For those who are not familiar with it is the cumulative total of the advancing stocks minus the declining stocks. On Friday 2507 stocks rose with just 658 declining which is a ratio of 3.8 to 1. For the week the A/D ratio was negative as 1526 stocks declined and just 1717 rose.
The NYSE weekly A/D line dropped below its WMA on Friday June 5th and it has continued to make lower lows. The five week divergence in the A/D line is consistent with a correction as at bull market tops the divergences form over many months. The A/D line is still well below its declining weekly WMA.
The daily chart of the NYSE Composite shows the drop below the support, line b, that goes back to the December low. This support now becomes resistance in the 11,000 area which is just above the quarterly pivot at 10,942. The downtrend from the May-June highs, line a, is at 11,100 or about 2% above Friday’s close. The NYSE hit monthly pivot support last Wednesday with it’s low of 10,622 and it is now the key level to watch.
The daily A/D line dropped below support from March, line d, last week before turning higher on Friday. The A/D line has reached its declining WMA with further resistance at the June high. The A/D line needs to move through the negative divergence resistance, line c, that formed at the May highs in order to signal that the corrections is over.
Key resistance Levels To Watch
- Spyder Trust (SPY) -$209.50-$211
- PowerShares QQQ Trust (QQQ) – $109.50-$110.25
- iShares Russell 2000 (IWM) – $125.50-$127.00
The 30% plunge in the Shanghai Composite added to the global equity fears as it tested the January highs, line a, early last week. The decline also took prices below the 50% retracement support level at 3576 but so far the 61.8% Fibonacci support at 3197 has held. The rally late in the week was strong but there is major resistance at 4100-4300 which is likely to stall the rally.
The Shanghai Composite topped just over a week before the S&P 500 while the DAX Index topped out on April 10th. It is fairly common for one global market to top or bottom ahead of others. For example, many of the emerging markets bottomed in late 2008 ahead of the US market’s bottom in March 2009
The DAX index dropped to the important support zone last week between the 38.2% and 50% retracement levels. This is normally where a correction in an uptrend will find support. It is therefore possible that the Dax has seen the worst of its correction but it needs to overcome the 11,650 level to stabilize the chart. The former uptrend, line b, is now in the 11,750 area.
The yield on the 10-Year T-Note dropped down to test the support at 2.20% area but then rebounded late in the week to close higher. Yields are now in a clear uptrend from the early 2015 lows (line b) suggesting that we may indeed see a rate hike by the Fed in September. A weekly close in yields above 2.50% would support this view with further resistance at 2.55%, line a.
Crude oil dropped 7.3% last week but it was the break of the key support level at $57 the previous week that turned the outlook negative as I mentioned in the June 26 market commentary. The volume was heavy on the decline suggesting that crude can continue even lower with next major support in the $48-$50 area. The HPI has dropped below the zero line indicating negative money flow. The daily HPI (not shown) is also negative and shows no signs yet of bottoming.
The outlook for gold is also still negative as it tested the key support in the $1144 area. The weekly technical studies like the on-balance-volume have already dropped to new lows so a more severe decline looks likely in spite of the positive seasonal tendencies.
It was generally a quiet week for economic data but the ISM Non-Manufacturing Composite index did improve but it is still in a downtrend. It will take much stronger numbers in the coming months to break the downtrend. Of the eighteen industries in the survey fifteen were reported as positive.
This week we have the Retail Sales and Business Inventories on Tuesday that are followed Wednesday with the Producer Price index, Empire State Manufacturing Survey and Industrial Production. Then on Thursday we have the jobless claims, the Philadelphia Fed Business Outlook Survey and a speech by Fed Chair Janet Yellen.
On Friday the Consumer Price Index, Housing Starts and Consumer Sentiment will be released. Of course the main focus this week will be on earnings as the energy stocks are expected to drop by 57%. For the second straight quarter the earnings outlook is quite negative as FactSet is looking for a 4.4% drop in earnings and revenues. Going into the 1st quarter their earnings projections turned out to be too negative.
One eminent market technician, Stan Weinstein, who was the long term editor of the Professional Tape Readers, often referred to what he called the “weight of the evidence” in explaining his view of the market’s trend.
In my review the bearish formations in the weekly and daily A/D indicators along with the weekly topping formations on many of the key indices indicates to me that a further rally over the next week or so will be followed by another decline.
The completion of the weekly rising wedge formation in the iShares Russell 2000 (IWM) is another piece of negative technical evidence. Therefore the weight of the evidence indicates this is a rally that you cannot trust.
The correction is likely to be over in the next month or so and will present a good buying opportunity for what I expect to be a strong 4th quarter rally. There are of course some industry groups that are already acting stronger than the overall market and may have already completed their corrections. This includes the utilities, REITs and many of the home constructions stocks.
I post regular charts and commentary on both Twitter and StockTwits
The sharply higher opening last Wednesday spooked those who were short the market and encouraged the bulls to buy more especially in the market leading Nasdaq 100. The euphoria was short lived as the market dropped sharply Thursday and closed weak ahead of Friday’s job report.
The S&P 500 stock index futures were down about 4.0 points ahead of the jobs report which came in as expected. The selling picked up after the opening . As noted early in the week, the daily and weekly technical studies were still in the corrective mode suggesting that the market’s correction was not over. For full details see the Market Wrap section.
Though the data suggests that mutual funds are holding a small level of cash most data suggests that individuals are not heavily invested in the stock market. For those not invested should you be looking in the US or overseas?
As regular readers are aware the German Dax Index has been doing much better than the S&P 500 since the start of 2012. In early April 2015 the Dax had outperformed the S&P 500 by 40%. The gap narrowed to just over 20% in late June lows but there are now some signs that the Dax’s correction may be close to over. So where in the world should you be looking to invest now?
The Vanguard MSCI Europe (VGK) has total assets of $15.6 billion, a yield of 3.17% and an expense ratio of 0.12%. It is up 8.36% YTD as it is down just over 4% from the mid-May high of $57.61.
There are 517 holdings in the portfolio with the largest in Nestle (2.6%), Novartis (2.4%) and Roche Holding (2.3%). There is 31.6% in United Kingdom companies with 67.8% in developed European stocks.
The weekly chart shows what appears to be a long term flag or continuation pattern, lines a and b. The ETF is now resting on the flat 20 week EMA and is trying to hold above the quarterly pivot at $55.09 with recent support at $54.14. The panic low in early July was $51.69 which is a key level to watch.
The weekly relative performance is trying to bottom out as it shows a pattern of higher lows with long term resistance at line c. The weekly on-balance volume (OBV) continues to lead prices higher as it shows a well established uptrend, line d, and made a new high just a week ago.
The Vanguard FTSE Pacific (VPL) has total assets of $3.06 billion, a yield of 2.47% and an expense ratio of 0.12%. It is up 6.83% YTD but down 3.69% in the past three months. There are 837 stocks in the portfolio with just 16.5% in the top ten holdings including Toyota Motor (3.17%), Samsung (2.2%) and Commonwealth Bank of Australia (1.19%). Just over 62% of the stocks are Japanese with 18% in Australasia, and 18.3% in developed Asia.
VPL made a new high in May at $65.05 and is now close to the quarterly pivot at $59.44. The weekly starc- band is at $57.31 with monthly pivot support at $57.09. There is chart support from 2013, line e, in the $56.40 area.
The relative performance broke its downtrend, line f, in March which is consistent with a long term bottom. The RS line has turned up but is still well below its WMA. The weekly OBV is below its WMA but still is above the longer term support at line g.
The MSCI Vanguard Emerging Markets (VWO) has total assets of $43.8 billion, a yield of 2.81% and an expense ratio of 0.15%. It is down 5% YTD as it has lost 12.5% over the past three months. There are 996 stocks in the portfolio with 16.75% in the top ten holdings. There are 65.4% of the holdings in Asia with 18.4% in Europe
It has had a high for the year of $44.67 with weekly resistance, line a, now at $44.50. There is weekly support, line b, and the starc- band at $36.65. The monthly pivot support is at $35.14. the declining 20 day EMA is at $38.53 with stronger resistance in the $40 area.
The relative performance has been in a well established downtrend, line c, since 2013 and has dropped to further new lows over the past month. The OBV topped out in March and is now close to next long term support. The daily studies show no signs yet of a bottom.
The Vanguard Total World Stock (VT) has total assets of $4.65 billion with a yield of 2.32% and an expense ratio of 0.17%. There are 7210 holdings in the portfolio with just over 7% in the top ten holdings. There is 55% of the portfolio in the US, with 24.3% in Greater Europe and 19.2% in Asia.
VT dropped to a low of $59.86 in early July with the starc- band and chart support (line e) in the $59 area. The 20 week EMA is at $61.99 with the recent high at $62.81. The weekly RS line is still in a long term downtrend, line f, but is trying to turn up. The OBV is acting weaker as it is below its declining WMA and has made lower lows.
Once the correction is over I still like the US stocks the best but I am also looking for a pullback to stronger support in both the Vanguard MSCI Europe (VGK) and the Vanguard FTSE Pacific (VPL) as a buying opportunity as they look the best technically.
It is still likely to take some time before for the MSCI Vanguard Emerging Markets (VWO) can bottom out. The Vanguard Total World Stock (VT) is probably closer to a bottom but would look especially attractive in the $59-$60 area.
The individual investor turned a bit more bullish as of Thursday as the % of bulls rose from 21.1% to 24.3% while the bearish % dropped 9% to 31.7%. I would not be surprised to see the bullish % drop this week in reaction to some of the sharp declines of individual stocks.
The 5 day MA of the % of S&P 500 stocks above their 50 day MA closed last Thursday at 46.3% and is likely to drop further after Friday’s close. It is still well above the oversold levels last seen in late June and early July when it was 2 standard deviations below the mean. Therefore it can go lower before it is back to extremely oversold levels.
Though Apple, Inc. (AAPL) did close above the lows there were quite a few widely stocks that were hit hard. Market leader Disney (DIS) was down 9.5% for the week while Tesla (TSLA) dropped 7.7% as both disappointed on earnings. Of course the biggest loser was Keurig Green Mountain (GMCR) as it was down 29%.
Commodities & Interest Rates
It was another rough week for crude oil as it dropped another $3.30 per barrel to close just above the March lows. Though the sentiment is extremely bearish there are no signs yet of a bottom as both the weekly and daily studies are confirming the new lows.
The Comex Gold futures were just a bit lower as it has formed dojis over the past two weeks. This market is also quite oversold and likely overdue for an oversold bounce. Any rally should have trouble taking the futures above $1115 or the SPDR Gold Trust above the $107-$107.50 level.
The yield on the 10 Year T-Note declined slightly last week but is still holding above the more important support. The jobs report came in as expected which in a survey Friday has just over 50% of economists looking for a rate hike in September. There are quite a few data points between now and then so in my mind the verdict is still out as the odds favor a December rate hike. The high yield bond market has continued to drop sharply.
Last week the key PMI and ISM Manufacturing Index on Monday were in line with expectations while the Construction Spending was a bit lower. The Factory Orders and the PMI Services Index came in as was expected.
In contrast the ISM Non-Manufacturing Index was strong at 60.3 which much better than the 56.3 that was expected. As the chart indicates this was the highest reading in the past three years. This is a very strong sign for the economy if these levels can hold over the next few months.
This week there is a light calendar with Productivity and Costs on Tuesday followed by Retail Sales, Business Inventories along with Import and Export prices on Thursday. On Friday we get the PPI, Industrial Production and the mid-month reading from the University of Michigan on Consumer Sentiment.
Stocks were hit hard in early trading Friday but did manage to stabilize in afternoon trading as most of the major averages closed well above the day’s lows. The Dow Industrials lost 1.8% for the week as it was the seventh day in a row that the Dow declined. The Transports were not far behind as they lost 1.7% while the Utilities were one of the bright spots as they were up 1.1%.
The S&P 500 was down 1.25% which was a better than the 2.6% drop in the small cap Russell 2000. The NYSE Composite was down 1.1% and the negative weekly A/D ratio has kept the NYSE A/D line (not shown) in its downtrend and below its WMA.
The Spyder Trust (SPY) dropped to test the daily starc- band and the quarterly pivot at $207.38 before closing well above the day’s lows. The late July low at $206.26 is still holding with the monthly pivot support at $205.36. There is important support in the $204.50-$205 area, line b. There is short term resistance at $209.72 and the declining 20 day EMA with further at $211.45.
The S&P 500 A/D line is slightly below its WMA but shows no increase in downside momentum. The A/D line has key resistance at line c which needs to be overcome to signal that the correction is over. The daily OBV has broken its uptrend (line d) and is now in a clear downtrend.
The PowerShares QQQ Trust (QQQ) lost 1.47% for the week as the biotech stocks were hit with heavy selling. The iShares Nasdaq Biotechnology ETF (IBB) lost 3.6% for the week. The QQQ has next support in the $107.43 and the quarterly pivot. The weekly starc- band is at $104.18. There is resistance now in the $111-$113 area.
The Nasdaq 100 A/D line again tested the downtrend (line c) before turning lower. The A/D is still holding above the short term support at line d. A break of this level would be more negative. The OBV is closer to important support at line e, and is below its WMA.
The iShares Russell 2000 (IWM) closed below the July lows and the more important support, line f, in the $120-$121 area. The daily starc- band is at $118.29 with the weekly at $116.08. The sharply declining 20 day EMA is now at $112.66 with last week’s high at $123.53. The quarterly pivot is at $124.20.
The Russell 2000 A/D line dropped below support, line h, on July 23rd and closed the week just barely above the recent lows. The WMA is declining more sharply with key A/D line resistance at line g. The daily OBV is weak with next support at line i. The weekly OBV (not shown) is still holding above its WMA.
There have been no signs of panic liquidation yet as the ARMs Index hit 3.19 in early July. I would expect to see a day or two of heavier selling before the correction is over. Last week’s drop in the highly favored biotech stocks could precipitate more nervous selling. Therefore I would wait to be an aggressive buyer until there are clear signs of a market bottom.
The stock market has started off the month of August on a relatively weak note yet so far no heavy selling has developed in the major averages despite the sharp decline in market bell weather Apple, Inc. (AAPL). The multiple time frame volume analysis of AAPL still points lower as there has been no improvement since last month’s review “Volume Warned of Apple’s Drop”.
The A/D line analysis of the NYSE Composite, S&P 500, Nasdaq 100 and Russell 2000 is still in the corrective mode so a further decline cannot be ruled out. It would take a drop below last week’s lows in the major averages to trigger heavier selling.
The futures are sharply higher in early trading despite the fact that market leader Disney (DIS) is down 8% ahead of the opening. Of course the close is what is important and would take take several days of strong A/D numbers to indicate that the market has really bottomed out.
The month end analysis of the key sectors shows that the leadership role has been taken over by the Consumer Discretionary Sector Select (XLY) as it is now up 11.2% versus just a 2.4% gain in the Spyder Trust (SPY). It started to outperform the Health Care Sector Select (XLV) last week as it is up 10.1%.
They are the only two double gainers so far this year as the XLE, XLI and XLB are the weakest. All are below their quarterly pivots . There have also been some significant changes in both the weekly and monthly technical studies for many sectors though both time frames are negative for these three underperforming ETFS.
The choppy summer trading has left many investors on the sidelines and as I noted last week (Is Bearish Sentiment High Enough?) the bullish sentiment is quite low. Based on the multiple time frame analysis at the end of July there are three sector ETFs that look attractive for new purchase while one of the year’s weakest ETFs now bears close watching.
The weekly chart of the Consumer Discretionary Sector Select (XLY) moved through the weekly resistance in the middle of July and it has continued to push higher.
- The weekly starc+ band is at $82.18 with August projected pivot resistance at $83.35.
- Both the rising 20 day EMA is at $79.01 and the monthly pivot at $78.95 are close to the breakout level (line a)
- The daily starc- band stands at $78.25 with the rising 20 week EMA at $77.08.
- The relative performance surged to another new high last week and is still well above its long term uptrend, line b.
- The on-balance-volume (OBV) broke through its resistance, line c, in June . The OBV’s WMA is rising strongly.
- The daily indicators (not shown) are also positive.
The Utilities Select Sector (XLU) has been lagging the stock market all year as it is down 6.8%. XLU has total assets of $6.1 billion, a yield of 3.5% with an expense ratio of 0.15%.
- XLU closed strong last week and above the prior seven week highs but it was down on Tuesday.
- XLU had been below its quarterly pivot throughout the 2nd quarter.
- On July 10th it closed above the 3rd quarter pivot at $42.61.
- The rising 20 day EMA is now at $43.16 as the daily starc+ band was tested Monday
- The relative performance dropped below its WMA in February one week after the highs.
- The RS line now appears to have bottomed out as it moved above the resistance, line e, and its WMA.
- The OBV was able to move above its resistance, line f, in July and its WMA is starting to turn up.
- The monthly pivot resistance is at $45.09 with the weekly starc+ band at $45.81.
The Consumer Staples Sector Select (XLP) closed above its weekly resistance, line a, three weeks ago. XLP has total assets of $8.25 billion, a yield of 2.45% and an expense ratio of 0.15%.
- The starc+ band is at $51.26 with the monthly pivot resistance at $52.28.
- The monthly pivot is at $49.51 with the rising 20 week EMA at $48.82.
- The downtrend in the RS line was broken at the start of July and the WMA was also overcome.
- The relative performance has risen sharply and is now well above its WMA.
The OBV made a marginal new high two weeks ago but its WMA is just rising slightly.
- The daily OBV (not shown) is also lagging the price action while the relative performance is strong.
The iShares Dow Transportation ETF (IYT) has had a rough year as the airlines which were the top performers in 2014 have crashed this year. IYT has total assets of $879 million with a yield of 0.96% and an expense ratio of 0.45%.
- IYT finally closed above the quarterly pivot at $149.84 last week for the first time since early April.
- The monthly pivot resistance is at $153.69 with the starc+ band at $157.26.
- The relative performance topped out early in the year but has now moved above its WMA.
- The weekly RS line has not yet completed a bottom but the daily analysis is positive.
- The weekly OBV is still below its declining WMA while the daily is positive.
- The rising 20 day EMA is now at $148.63.
What to do? Given the choppy trading I would be looking for setbacks to start establishing positions in Consumer Discretionary Sector Select (XLY), Utilities Select Sector (XLU) and Consumer Staples Sector Select (XLP). Any pullbacks to the rising 20 day EMAs should present a good entry point as all three are likely to be market leaders for the rest of the year.
I will be watching the iShares Dow Transportation ETF (IYT) over the next several weeks to see if there are signs that it has completed a weekly bottom and is again becoming a market leader.
The weakness in the Shanghai Composite spooked investors at the start of the week but they seemed to be less concerned as the week progressed since the Composite lost another 10%. It was the worst month for the Shanghai Composite in the past six years.
As the US market gapped lower to start the week the full slate of earnings reports and economic reports made many nervous. Therefore the 1.20% gain for the week in the Spyder Trust (SPY) was a pleasant surprise.
The earnings seasons has been a positive for the market though several companies did disappoint. Thomson Reuters is looking for a 0.8% gain in earnings which was considerably better than the pre-earnings estimate of a 1.2% decline.
As the market moved higher last week individual investors became more bearish according to AAII. The questions is are they bearish enough to support a broad based market rally that can move all the major averages to new all time highs?
In last week’s American Association of Individual Investors (AAII) survey the % of bearish individual investors jumped 15.1% to 40.7% which is well above the long term average of 30.3%. This is the highest reading since August 22, 2013 (point 1). It had spiked in April of that year with back to back readings of 48.2% and 54.5% (point 2).
These extreme readings in 2013 just corresponded to just brief interruptions in the major stock market rally of 2013. These high readings occurred while the 20 week MA was falling which confirmed that the bearish % was still in a downtrend. This was in contrast to the periods when the MA was rising in 2011 and 2012.
In my market trend analysis I have found the bearish% to be less valuable than the bullish% which dropped last week to 21.1% which was a decline of 11.4%. This is lower than the 22.61% reading on July 2, 2015 but above the 20.04% reading from June 11, 2015. Prior to these readings the bullish% had not been below 25% since April 11, 2013 when it dropped to 19.31%.
During the market’s correction from July through early October 2011 it never dropped below the 25% level. During the equally severe 2010 correction it hit a low of 20.94% on July 8th and then 20.74% on August 26th before the market bottomed in early September.
At both the 1010 and 2011 lows the NYSE Advance/Decline line gave clear signs just days after the lows that the market’s correction was over. In 2013 the A/D line was strong throughout the year so the extreme low readings in the bullish% came within the context of an A/D line that was in a strong uptrend.
In the Market Wrap section it is evident that neither the weekly or daily A/D lines are indicating that the corrections from highs is over. The bullish sentiment is low enough to suggest that a bottom could be completed in the coming weeks.
When the Nasdaq 100 made a new high on July 20th I pointed out (Narrow Advance Warrants Caution) that rally was the result of the gains in just a few stocks. AMZN, AAPL, MSFT , GOOG and FB make up represent 35% of the PowerShares QQQ Trust (QQQ. Therefore the new high (point 1) was giving one a distorted picture of the market.
The Nasdaq 100 A/D line actually peaked on May 18th and has been diverging since then as it has formed a series of lower highs, line c. The A/D line has moved back above its WMA but needs to move strongly above the July highs to turn positive. The OBV turned down Friday and has also formed lower highs, line e.
It was a rough month for both gold and crude oil as the gold futures had the worst month in two years. The SPDR Gold Trust (GLD) was down 6.6% for the month. The gold market tried to rally last week in line with the high level of bearish sentiment but there are no signs yet of a bottom.
It is a similar situation for crude oil where the bearish sentiment is also very high and the energy stocks continue to report very weak earnings. The nearby crude oil contract was down 8.3% in July and many have began again to lower their year-end price targets to $30 per barrel.
Both Exxon-Mobil (XOM) and Chevron (CVX) were down well over 4% on Friday and they contributed heavily to the decline in the Dow Industrials on Friday. My analysis of the energy sector does suggest that this sector could make an important low by year end. In contrast many big name Wall Street firms are quite negative on the energy stocks with some even looking for dividend cuts.
Yields on the 10 Year T-Note dropped again last week down to 2.205% from 2.271% a week ago. The daily chart shows that the long term downtrend, line a, was broken in early June. There is next support at 2.140% with key support at 2.056%, line b. The daily MACD has been negative since June and it continues to form lower highs with no signs yet of a bottom.
For a change the better than expected economic news this week coincided with generally higher stock prices. The revision of the 1st quarter GDP to up 0.6% from down 0.2% gave investors some hope while the advance reading of 2.3% for the 2nd quarter GDP was a bit lower than expected.
It was a more encouraging week for the manufacturers as they have been a concern for most of the year. Durable Goods data was strong as was the Richmond Fed Manufacturing Index. Also on Friday the Chicago PMI came in at 54.7 while most economists were looking for a reading of 50. The PMI had been below 50 for several months which was a sign of weak manufacturing.
Last Tuesday the Consumer Confidence plunged to 90.0 which was well below the prior month revised reading of 99.8. The University of Michigan Consumer Sentiment Friday came in at 93.1 which was close to the mid-month reading. These gauges of consumer sentiment will be important to watch as we head into the fall months when consumer buying is generally strong.
The Employment Cost Index (ECE) caught the markets by surprise on Friday as it dropped to 0.2% from the prior months reading of 0.7%. This reflects a decline in both wages and salaries so there are no signs yet that inflation is picking up. The ECE report pushed the dollar lower as bonds moved higher on the thoughts that the Fed may not start raising rates in September.
This week we get the Personal Income and Outlays, as well as the PMI and ISM Manufacturing Index on Monday along with Construction Spending. OnTuesday we get Factory Orders followed Wednesday by the ADP Employment Report as well as the PMI/ISM Non-Maunufactoring Index. Then on Friday we get the monthly jobs report.
There were strong gains last week in the Dow utilities and Dow Transports as they were up 3.77% and 3.96% respectively. They did much better than the 0.69% gain in the Dow Industrials. The S&P 500 was up 1.16% and Friday’s sharp rally in the Russell 2000 helped it gain 1.03% for the week.
The NYSE Composite gained 1.50% last week as the high came close to the 20 week EMA. The weekly downtrend is in the 11,060 area with further resistance at 11,170. The weekly starc+ band is at 11,370. There is short term support now at 10,750 with more important at the quarterly pivot support at 10,620 which was tested last week. This level also corresponds to the chart support at line b.
The positive weekly A/D numbers caused the A/D line to turn higher but it is still well below its declining WMA. The weekly A/D line needs to move through the downtrend, line c, to turn positive. The daily NYSE A/D line (not shown) is still in a clear downtrend.
The Spyder Trust (SPY) dropped to test the quarterly pivot at $207.38 last Monday before turning higher. The daily starc+ band is at $212.69 with the all time high at $213.18. There is important long term support, line a, in the 205 area.
The S&P 500 A/D line closed the week just barely above its WMA but turned lower on Friday. The A/D line still has important resistance at the downtrend, line b, and then at the July high. The A/D line shows a longer term pattern of lower lows, line c. The on-balance-volume (OBV) has dropped back below its WMA and it is still well below the long term downtrend.
In addition to the strong gain in the utility average the industrials also did well but the Industrials Sector Select (XLI) is still down 3.25% for the year. Health care was up 2.28% for the week but both the financials and technology stocks managed just minor gains.
It has been a tough earnings season for individual stock holders as Twitter (TWTR) is down over 20% in the past three months. It dropped 12.45% last week while Yelp (YELP) was down 23.6%. Even the diversified Global X Social Media (ETF) was down 4% for the week but is still up over 5% for the year.
If the market corrects early this week but is then able to close the week higher it will support the case that the market is going to move higher. A lower close should keep the bullish% low and the technical studies do suggests that the market needs more time before it begins a sustainable new uptrend. I would not be an aggressive buyer until the A/D lines confirm that the correction is indeed over.
My analysis during the week can be found on both Twitter and StockTwits with my daily and weekly columns also at Tutor Your Trade.