The Week Ahead: A Year End View of Today’s Market
The narrowing ranges in the stock market over the past two weeks and the fact that it did not collapse last week appears to have soothed some investors. Surprisingly the rough market action over the past month has apparently has not caused investors to panic. Morningstar reported last week that outflows from US stock mutual funds and ETFs in August was only $4.9 billion as compared in $9.6 billion in July.
This relatively low level of outflows (it was $25.9 billion in April) and 2.3% uptick in bullishness by individual investors in the past AAII survey is not what one would typically see if the market was close to an important low. According to AAII the bullish and bearish percentages as of Thursday’s survey are about equal at 34.6% and 35% respectively.
These readings can be interpreted as a sign that the individual investors are becoming more astute or it is a sign of complacency that will lead to a further market decline. How will the current market action be viewed at the end of 2015?
On the weekly chart of the S&P 500 I have added the economic headlines that coincided with some of the important stock market lows since 2010. They illustrate some of the economic concerns as well as the fears of investors that accompanied some of these market corrections.
Prior to each of these market lows there was generally an increasing level of bearish commentary. In May 2010 an Economist article highlighted some of the market’s concerns as they said ” Fears are growing that the global recovery will falter as Europe’s debt crisis spreads, China’s property bubble bursts and America’s stimulus-fuelled rebound peters out. ”
These concerns still sound quite familiar but then the Economist correctly concluded that the fears were exaggerated. In June 2010 Paul Krugman warned that policy makers concern over inflation could cause “The Third Depression” as he felt that deflation was the real threat.
By August this was a more common view as noted in in the WSJ “Big Investors Fear Deflation”. This coincided with multiple low readings (20-22%) in the AAII bullish individual investor sentiment. The stock market decline ended in early September as the NYSE A/D line completed its bottom formation.
These global fears surfaced again in 2011 as the correction lasted from late July until early October. This correction in my view (The Week Ahead: A Replay of 2011 or 2012?) had some similarities to the current market decline. Fears of a new recession dominated the press after the debt ceiling crisis and the lowered rating of US debt.
The decline in August 2015 was the worst since the May 2012 drop of 6.2% as investors then scrambled to buy bonds as yields dropped below 1.5%. Stocks bottomed in early June of 2012 as both the NYSE A/D line and McClellan oscillator formed bullish divergences.
On the chart I have also annotated the correction in late 2012 as well as those in 2013 and then in early 2014 when the GDP turned briefly negative. On October 15th of 2014 the Guardian article “Fears of global slowdown spark fall on European and US stockmarkets” corresponded with the market’s low.
Last Friday the German finance warned that “the global economy faces a financial bubble from central banks pumping cash into economies” and of course this comes as the market waits for the FOMC meeting next week.
So at the end of 2015 analysts may conclude that this market decline was caused by fears of a September rate hike that ultimately did or did not occur. If the next multiple week market rally is not impressive analysts may point to the current complacency as a warning for the market going into 2016.
The flag formation on the chart of the NYSE Composite is still intact as the support, line b, was tested several times last week. The fact that this formation is now getting so much media attention makes it less reliable and favors more choppy action. A sharply lower close early in the week and a break of support may not see any follow through to the downside.
The several levels of resistance in the NYSE A/D line are still intact with the major downtrend, line c, representing the bearish divergence from the May highs. The first sign that the market had improved would be a break of the short term downtrend (dashed line) . A move above the further resistance at line d, would be much more encouraging.
The downtrend in the OBV has been broken as the WMA is now trying to flatten out. The monthly pivot and the declining 20 day EMA are now at 10,201 and represent the first level of resistance. There is more important resistance now at 10,350-500 with chart resistance at 10,750 (line a).
There was little in the way of economic data last week as the Producer Price Index came in unchanged which was weaker than expected. More importantly Friday’s mid-month reading on Consumer Sentiment from the University of Michigan came in at a disappointing 85.7 which was down from July’s 91.
This preliminary report looks pretty negative on the chart (courtesy of dhort.com) but it is the final monthly reading on September 25th that is important. The downtrend from the 2000 highs, line a, was broken in early in 2014 and this positive signal is still intact.
We will get another reading on the consumer Tuesday with the Retail Sales report but the focus will be on the FOMC meeting that starts Wednesday and concludes Thursday afternoon with the Fed Chair’s press conference.
There is plenty of data on manufacturing this week with the Empire State Manufacturing Survey, Industrial Production and Business Inventories on Tuesday. This will be followed by the Philadelphia Fed Business Outlook Survey Thursday and the all important Leading Economic Indicators (see last week) on Friday.
On the housing front we have the Housing Market Index on Wednesday followed by the Housing Starts on Thursday.
Interest Rates & Commodities
The yield on the 10 Year T-Note rose slightly last week but there was no change in either the weekly or daily technical studies. The weekly MACD is still negative while the daily is negative as yields have just rallied back to the underside of the daily uptrend.
The junk bond ETFs have had a tough year as the plunging bonds of some energy companies have depressed the high yield market. The SPDR Barclays High yield Bond ETF (JNK) is down 9.1% from its 52 week high. Since the August 24th panic low of $35.83 JNK has rallied sharply but the rebound looks like just a pause in the downtrend.
The downtrend, line a, is at $37.25 with the daily starc- band at $37.48. There is further resistance in the $38 area. The OBV broke support, line c, on May 12th (line 1) well ahead of prices. It has been in a downtrend (line b) since then and shows no signs yet of a bottom.
The SPDR Gold Trust (GLD) closed the week lower in line with the negative technical readings last week and the weekly OBV made a convincing new low with prices. This confirms that the rebound from the July lows was just a bull trap.
Crude oil was also lower as it was down $1.29 on Friday. The market was hit with more bearish fundamental news. Goldman also commented that the risk of crude oil falling to $20 was rising. This is in contrast to the technical outlook which indicates prices are stabilizing, A sharply higher weekly close could complete a bottom.
It was a good week for stocks with the Dow Industrials and S&P 500 up 2% but both lagged the 3.3% gain in the Dow Transports. The Nasdaq Composite also was up close to 3% but the market internals were not as strong as prices with 1808 advancing and 1409 declining.
The daily chart of the Spyder Trust (SPY) has shown little change over the past week as prices have been bumping into the 20 day EMA but it has failed to close above the monthly pivot at $197.08. There is more important resistance at $200 with major in the $204 area, line a. There is initial chart support in the $194 area with further at $190.50-$191.50.
The S&P 500 A/D line is in a short term uptrend as it closed the week just above its WMA which is trying to flatten out. The A/D line has initial resistance at the July lows with major still at the downtrend, line b. The OBV has also moved above its WMA but has strong resistance at line c.
The daily chart of the iShares Russell 2000 (IWM) shows a better defined continuation pattern and a close below $111.60 would signal a drop back towards the August lows. The daily starc- band is at $109.15. Once above last week’s high at $116.42 the next resistance is at $117.50 (line a). The daily downtrend, line a, is in the $121.50 area.
The small caps were much weaker than the S&P from late June as the downtrend in the relative performance, line b, indicates. The break of this downtrend on August 21st suggested that the IWM was starting to outperform the S&P 500. The uptrend in the RS, line c, suggests IWM is becoming a market leader. The weekly RS analysis is also now trying to bottom.
The daily Russell 2000 A/D line (not shown) is close to breaking its short term downtrend. The daily OBV has turned up but is still slightly below its WMA.
What to do?
It has been my view since early July that the stock market was vulnerable and a high risk buy. I continue to think that it is too early to be an aggressive buyer as bottom fishers are likely to get burned even though the risk was diminished. As I discussed last week (Time To Join The Bear Market Camp?) I do not see signs that we have begun a new bear market.
I would caution traders not to fall for some of the short term positive signals from momentum studies that some analysts are banking on. Having used the MACD and RSI for over 33 years these short term signals only result in short term rallies not sustainable market bottoms.
There are a number of stocks and industry groups that are emerging as new market leaders. Once there are clear signs that the market has bottomed they are likely to continue to outperform the S&P 500.
If you are interested in my other market services or would like me to speak to your investment group I can be contacted at email@example.com.