The stock market surged and swooned last week on earnings as there was a host of winners and losers. The tech sector had been the big winner the previous week and while LinkedIn (LNKD) surged over 10% last week, Twitter (TWTR) and GoPro (GPRO) recorded double digit losses.
The implications of merger talks between health care giants Pfizer (PFE) and Allergan (AGN) caused new focus on the health care sector which has been lagging on the current rally. Even more important to many investors was the sharp drop in Valeant Pharmaceuticals (VRX) which was rocked by an October 21st report from a noted short seller that VRX could be the next Enron. The stock has lost over 40% since the report was released.
Mutual fund giant Sequoia (SEQUX) has been in the cross hairs as reportedly two of its board members that had questioned the investment in VRX resigned last weekend. This large growth fund has total assets of $7.5 billion and I was surprised to see that it was rated five stars by Morningstar as I have great respect for their research.
I have consistently advised investors to carefully research any ETFs or mutual fund before they buy and I was surprised to learn that VRX makes up 28.7% of SEQUX. The second largest holding is just a 6.66% holding in Berkshire Hathaway Inc. (BRK-A) followed by 5% in TJX Companies (TJX)
From my perspective this very high concentration in one stock is contrary to the reason why investors consider mutual funds in the first place. At the end of July SEQUX closed at $272.72 which was very close to its starc+ band. By last Thursday SEQUX had dropped to $223.02, a loss of over 18%.
By the middle of August the uptrend, line a, had been broken. Three weeks later SEQUX had rallied back to its then declining 20 week EMA, point 1. This topping pattern was confirmed by the relative performance which dropped below its support, line b, and its WMA.
Valeant Pharmaceuticals (VRX) made its high in early August and three weeks later it dropped through support at line c. In September, the on-balance-volume (OBV) dropped below its WMA (point 2) and volume increased as VRZ moved lower. The weekly RS analysis was also indicating that VRX was no longer a market leader.
ETF investors and traders also need to be aware of the level of diversification in ETFs they are considering. For example, the Sector Select Health Care (XLV) has 55 holdings with 10.32% in Johnson & Johnson and 8.12% in Pfizer. In contrast the Vanguard Health Care (VHT) has a total of 336 holdings with 8.65% in Johnson & Johnson and 6.46% in Pfizer. Though both have too high a concentration in Johnson & Johnson VHT is clearly more diversified with 336 holdings.
The clear lesson from Sequoia (SEQUX) is that even the holdings in your mutual funds should not be ignored. If you are working with an advisor who recommends a fund, ask them if they have closely looked at the fund’s holdings. Their answer should help you decide whether you have the right advisor.
Hedge fund investors have also had to face the same problem as hedge fund manager Bill Ackerman spent over 4 hours in a conference call on Friday defending his $4 billion dollar position in Valeant Pharmaceuticals (VRX). The leading short seller in VRX announced while the call was progressing that the news could get even worse. This caused further selling in the afternoon as Ackerman’s position is showing about a $2 billion dollar paper loss.
Though many of the health care and biotechnology stocks have failed not rallied as much as the S&P 500 since the October 2nd lows the monthly analysis of the Vanguard Health Care (VHT) is still positive. VHT has been able to stay above its 20 month EMA in October with key resistance now at $136.77 which was the September high.
Multi-time frame relative performance and volume analysis plays an integral part in the specific trading and investing ETF advice that I provide in my Viper ETF Report. The monthly RS broke through resistance, line a, in May 2011. This alerted investors to the break through twelve years resistance by the health care sector the following year. With the monthly RS line now testing its WMA, the November close becomes increasingly important. Though the weekly RS analysis is still negative, the daily analysis (take note traders) does appear to be bottoming.
The monthly OBV has been in a strong uptrend, line b, since early in the bull market and did make a new high with prices in July. It will turn higher this month which continues to be a positive for the long term. Both the daily and weekly OBV (not shown) are positive but a surge in the daily volume is needed to signal acceleration on the upside.
The monthly chart of the NYSE Composite shows that the long term support, connecting the 2009 and 2011 lows has been tested over the past three months. The NYSE looks ready to close the monthly back above the 20 month EMA even though the final numbers are not in yet. The next resistance is in the 11,000-11,250 area while the upper boundary of the trading channel (line a) is in the 12,600 area.
The monthly NYSE A/D line moved above its WMA in May 2009, point 1, after being negative for the majority of 2008. The A/D line dropped below its WMA last month but has risen back above in October. Though the OBV is rising it is still below its flat WMA but well above the long term support at line c.
The high yielding large cap stocks have been some of the strongest stocks in October as the SPDR Dow Jones Industrial (DIA) is up over 10% as it looks ready to close the week just below the quarterly pivot resistance at $178.35. There is further resistance in the $180-$180.50 area.
The Dow Industrial A/D line closed above its short term downtrend, line c, and its WMA on Friday October 9th. This was one week after the important reversal on Oct. 2nd. The A/D line is still well below the longer term bearish divergence resistance at line b. The OBV is acting stronger than prices as it has moved well above the resistance at line d.
Interest Rates & Commodities
The yield on 10 Year T-Notes declined slightly last week after the recent bounce from below the 2.00% level . A decisive close above 2.30% is needed to break the downtrend of lower highs, line a, and lower lows (line b). A decisive close below 1.98% is needed to reinforce the downtrend.
I was looking for one more rally before the rebound in gold was over but with last week’s close below the prior two week lows suggests that the rebound is over. The rally from the July lows looks like a bear flag formation, lines a and b.
The weekly OBV broke support, line f, In July which was a sign of weakness. The OBV dropped below its WMA this week suggesting that the rebound is over. This indicates that vertical put spreads should be established on any rally. I will be looking for a good risk/reward trade in the next week or so.
Crude oil closed higher this week but a weekly close back above $48 per barrel is needed to signal a move back above the $50 level. The volume analysis has improved over the past three weeks.
There was not much good news for the economy last week as the Dallas Fed Manufacturing Survey was expected at -6.0 but it came in at -12.7. New Home Sales were also lower than expected. On Tuesday Durable Goods were also weaker while the flash PMI Service s came in as expected.
The Consumer Confidence dropped from 103 last month to 97.6 this month which was below the consensus reading of 102.5. Much of the decline was attributed to the view that fewer jobs were available than last month. As Econoday commented “five regional Fed reports all showing negative headlines for October. The Richmond Fed index did improve, however, to minus 1 from September’s minus 5.”
The preliminary 3rd quarter GDP last Thursday came in at a slightly disappointing 1.50. This is down from the 3.9 reading in the 2nd quarter. The Atlanta Fed is looking for growth of 2.5 in the 4th quarter. Also on Thursday the Pending Home Sales at -2.3% were quite a bit weaker than the expected gain of 1.0%.
Friday’s Personal Income and Outlays came in lower than expected showing no signs of impending inflation. The Employment Cost Index did come in a bit stronger than expected which was a bit better than expected. On the plus side was a surprising jump in the Chicago PMI which came in at 56.2 while most were looking for 49.1. The University of Michigan’s Consumer Sentiment reading of 90 on Friday was just down slightly from 92.1 in the middle of the month.
This week’s PMI Manufacturing Index and the ISM Manufacturing Index may be in contrast with the some of the weaker numbers that have come from the Fed regional surveys. Factory Orders on Tuesday are expected to stay weak but the focus for the week will be on Friday’s monthly jobs report.
In addition to the ADP Employment report on Wednesday we have the PMI Services Index and the ISM Non-Manufacturing Index.
Stocks were mixed Friday and for the week there were slight gains in the Dow Industrials, S&P 500 and Nasdaq Composite while the Dow Transports along with the Utilities were down over 2%. The A/D ratios were slightly negative for the week.
For the month the Dow Industrials were up 8.5%, followed by a 8.3% gain in the S&P 500 which was their best monthly gain since October 2011. The Nasdaq Composite was even stronger as it recorded a 9.38% gain for the month. This performance supports my view from August (The Week Ahead: A Replay of 2011 or 2012?) that the market could follow a similar course as it did in 2011.
The fact that earnings season has not been as bad as projected has been supportive for the market and i though that analysts were too negative before the earning’s season. The weekly chart of the Spyder Trust (SPY) shows that prices have reached the previously identified resistance zone ( lines a and b). A weekly close above $212.08 would be very bullish. There is first good weekly support now at $201.35 and the now rising 20 week EMA. The 50% support and the quarterly pivot are now in the $195 area.
The weekly S&P 500 A/D line tested the support from the 2014 lows, line d, on September 25th. Two weeks later the A/D line was able to move above its WMA and the downtrend, line c. On any correction the A/D lines should hold above its rising WMA.
The iShares Russell 2000 (IWM) managed just a 5.6% gain for the month. The downtrend, line a, was tested last Wednesday as IWM rallied on heavy volume (point b). This may be an early sign that the small caps are going to start to catch up with the other major averages. We should know this week as so far the pullback from Wednesday’s high is holding well above its 20 day EMA.
The IWM has been holding on a Friday’s closing basis above the quarterly pivot at $114.19. The OBV broke its downtrend, line c, several weeks ago but there needs to be stronger volume in order to confirm that a bottom is in place. Once above last week’s high at $117.14 the next key resistance is in the $120-$121 area.
Health care had the best week as it gained 3.1% which was much better than the 1.1% rise in the consumer services sector. Still it slightly lagged the S&P 500 for the month as this table from FT.com indicates. It also shows that the materials were the leader by far as the S&P 500 material sector was up 13.45%. There were four sectors that did better than the S&P 500 including energy, info technology and industrials.
What to do?
The example of mutual fund Sequoia (SEQUX ) and VRX I hope will encourage you to find out what is in your ETF or mutual fund. This information is readily available from sites such as Morningstar and I also provide portfolio analysis for individuals.
Now that the major averages have reached major resistance it is also a good time to review your holdings especially if you had a high concentration of stocks heading into this summer’s correction. If you have recouped many of your paper losses it would be a good time to reduce your exposure and raise some cash.
Though I do expect the market to move higher as we go into the end of the year the market is vulnerable over the short term so a pullback cannot be ruled out. Though it does not look likely as I pointed out last week investors should always be on the lookout for major reversals.
The fact that the PowerShares QQQ Trust (QQQ) has been testing its daily starc+ band for most of the past week was the reason I advised traders to take some partial profits last week. If we do get a correction this week I will be watching it closely for new entry points in some of the market leading ETFs.
The new closing low in the NYSE Composite on September 28th increased the bearishness of many analysts as investors were still trying to recover from the plunge in late August. Headlines like “Key Global Equity Index Has Fallen Off The Precipice” the following day likely caused more panic selling as the NYSE dropped below the prior day’s low.
The stock market bounced on the last trading day of September and then continued higher on October 1st before the sellers took over early on Friday October 2nd. The S&P futures were down 34 points as the weak jobs report triggered further selling. Many analysts were now looking for a drop well below the August 24th lows.
Instead the market reversed to the upside as the S&P 500 closed 60 S&P points above the day’s lows. In Saturday’s Week Ahead column I explained “Why Friday’s Reversal Was Important”. In my analysis I pointed out that the new closing low in the NYSE on September 28th was accompanied by higher lows in both the NYSE A/D line (line d) and the McClellan oscillator (line e).
The strong close on October 5th was accompanied by strong market internals which moved the A/D line through its downtrend, line c. After Friday’s close this was the technical action I was looking for in order to signal that the market had made an important turn. The steepness of the rise in the A/D line also supported a bullish outlook.
The NYSE Composite is now quite close to the daily downtrend, line a, and the 61.8% Fibonacci retracement resistance at 10,589. The daily A/D line has continued to make new highs with prices and a move through the major downtrend, line b, would be another positive sign. The McClellan oscillator has not made a new high in the past week but is still above the support at line e.
In order to confirm that a price reversal is important the price action must be supported by the action of the market internals and the A/D line. As the market was correcting in August I wondered if the market decline would look like that of 2011 or 2012. The market has now answered that question as the technical evidence is quite similar.
On October 3rd 2011 the NYSE Composite made a new closing low, line a,. The next day there was heavy selling on the open as the NYSE Composite dropped another 140 points before reversing to the upside, closing 150 points higher on the day and volume was heavy.
Both the NYSE A/D line and the McClellan oscillator made their lows in August 2011 and formed significantly higher lows in October, lines c and d. As was the case this year these bullish divergences indicated that at the new closing low, there was less selling. The divergences were confirmed on October 10th as the downtrend in the A/D line was overcome, point 1. As I said at the time “Be Bold, Be Fearless… Buy the Dip”
Of course investors also need to gain the skills necessary to recognize important downside reversals. After the bull market top in October 2007 the Spyder Trust (SPY) declined from a high of $133.81 to a March low of $107.67. The NYSE A/D line had peaked mid-way through 2007 and had formed multiple negative divergences before the market topped out.
The rally from the March low just rebounded back to the 61.8% Fibonacci retracement resistance at $123.78. The week ending May 23rd the SPY made a new rebound high at $123.85 before reversing to the downside and closing near the lows at $118.13.
The close was also below the prior three week lows. The OBV just rallied back to its downtrend, line a, during the rally which was a sign of weakness. A week later the daily NYSE A/D line had confirmed a top consistent with my view that this was a bear market rally.
Since the October 2nd low the sentiment has seen a gradual change as on October 5th one often quoted trader commented that the “markets appear to be have rallied a bit too far, too fast.” Other analysts maintained their skepticism as the following headlines indicate.
- Stocks: A Bear Market Until Proven Otherwise?
- The Stock Market Correction Is Not Yet Over”
Now that we are approaching the end of the month and the stock market has continued to move sharply higher the sentiment has clearly shifted. The CNN Fear & Greed Index has moved from a reading of Extreme Fear to Neutral. Surprisingly the Bullish % according to AAII has stayed relatively flat over the past four weeks it has had readings of 28.1%, 37.5%, 34.1% and was 34.8% last week.
The comments from the ECB last Thursday and the surprise cut in rates by the Peoples Bank of China let a fuse under a already hot market. As I discuss in the market wrap section, many of the market averages are now in high risk buy areas which does not favor chasing the market at current levels.
The data early last week on housing was a bright sport for the economy as the Housing Market Index, that reflects builder’s sentiment, came in at a strong 64. The Housing Starts were also positive though permits were down. Last Thursday the Existing Home Sales also came in better than expected.
Last Thursday’s Chicago Fed National Activity Index was weaker than expected as it indicated a ” lower-than-average economic growth for the month”. The better than expected PMI Flash Manufacturing Index at 54 on Friday was the best reading since last May. The weak data on manufacturing has had me concerned since the spring and maybe this report is an early sign of a turnaround.
The Leading Indicators last Thursday declined 0.2% in September as for the second monthly decline in a row as lower stock prices again put pressure on the LEI. The Conference Board commented that “Despite September’s decline, the U.S. LEI still suggests economic expansion will continue, although at a moderate pace,” said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board.
This week’s data may some further insight to the economy’s health with New Home Sales and the Dallas Feed Manufacturing Survey on Monday. It is followed on Tuesday by Durable Goods Orders, the S&P Case-Shiller HPI, PMI Services Flash and Consumer Confidence.
Of course the FOMC meeting starts on Tuesday and there will be an FOMC announcement on Wednesday afternoon. Next to the FOMC the market will likely be focused on the 3rd quarter advance reading on GDP which is out on Thursday along with the Pending Home Sales Index.
The Personal Income and Outlays is out on Friday, as well as the Employment Cost Index, Chicago PMI and the month ending Consumer Sentiment from the University of Michigan.
Interest Rates & Commodities
Yields closed up slightly for the week as the ranges were light despite the global action. The weekly studies are still negative but the daily studies are now trying to bottom.
Gold was lower last week as it has corrected from the mid-month highs. The SPDR Gold Trust (GLD) is now back to support so a rebound is likely in the next week or so. The volume on the rally in both the gold futures and GLD has been weak suggesting that the next rally should be an opportunity to sell gold.
Crude oil closed down over $3 per barrel last week reversing the positives from three weeks ago. In order to complete a longer term bottom formation crude needs a sharply higher close on strong volume in the next week or so.
Even though the Dow Industrials closed the week up over 430 points the 2.5% gain was a bit less that the Dow Transports 2.69% gain. The Nasdaq Composite did even better as it was up 2.97% but the small caps continue to lag with just a minor 0.32% gain in the Russell 2000. Once again the market internals were positive again this week and better than the previous week.
The strong earnings form tech giants Amazon (AMZN) , Microsoft (MSFT and Alphabet (GOOGL) pushed the technology sector to a 4.4% weekly gain. The industrials continue to act well as they were up 3.3% followed by a 2.3% gain in the financials. The oil & gas stocks remained under pressure as they were down 1.3% and the health care sector was down 0.83% as the plunge in biotech stock Valeant Pharmaceuticals (VRX) has investors avoiding the whole sector.
The Spyder Trust (SPY) gapped higher Friday to close just below the daily starc+ band at $208.41. The resistance at line b, was decisively overcome with next major resistance, line a, in the $212-$213 area. The weekly starc+ band is at $214.08 while the November projected pivot resistance stands at $220.32.
Since June (Three Reasons To Stay Patient) I had been warning about the negative divergence in the A/D lines including the S&P 500 A/D line. My focus had been on the downtrend, line c, which was finally overcome on October 9th. This completed the bottom formation and the breakout level was tested last week.
The OBV has broken its downtrend, line d, but is still lagging the price action. The weekly OBV (not shown) has made a new high and is acting stronger than prices. There is initial support now in the $204.50-$206 area with the rising 20 day EMA at $201.71.
The PowerShares QQQ Trust (QQQ) was up 2.8% on Friday as it opened above the daily starc+ band. It is not far below the all time high at $114.11. The weekly starc+ band is at $117.71 while the projected monthly resistance for November is at $121.59.
The iShares Russell 2000 (IWM) continues to lag the S&P 500 as it is up 2.44% in the past month compared to 7.18% gain in the SPY. The weekly chart shows that IWM is still below the declining 20 week EMA and the downtrend, line a, in the $117.20-$117.80 area. The quarterly pivot resistance is at $121.39.
The weekly Russell 2000 A/D line is slightly above its WMA but still below the downtrend, line b. The weekly OBV is holding up better than prices and is now close to moving back above its WMA. The daily studies are positive but are still below their key resistance levels.
What to do?
As I commented in the October 10th column ” The improvement in the daily and weekly technical outlook suggests that the stock market has likely resumed its intermediate term uptrend. I will be looking for a short term pullback in the next week to buy some of the ETFs that are outperforming the S&P 500. As we enter earnings season, these ETFs allow better protection against an earnings shock in any individual stock.
The following two days of very strong market internals (Should You Be Buying The Dip?) provided additional bullish evidence and reinforced the case for buying the dip. That day the SPY closed lower at $199.24 but subsequently accelerated to the upside and is now over 4% higher.
If you are interested in my specific trading and investing advice for the most liquid ETFs I would invite you to subscribe to the Viper ETF report. In addition to specific weekly recommendations subscribers also receive exclusive trading lessons that can help you become your own investing and trading expert.
Many traders are tempted to pick bottoms or tops without clear evidence that a market has turned or a well defined entry as well as exit strategy. Clearly the stocks in the energy sector have had a rough couple of years so there is much anticipation of an eventual turnaround in this sector.
The SPDR S&P Oil & Gas Exploration ETF (XOP) was down 29.4% in 2014 and is down 29.2% from the April high of $55.69. As a market is rallying it is important to be vigilant for signs that the rally is losing upside momentum. This is also true of a market that is in a protracted decline as the technical studies will generally give you clear signs that a market is bottoming.
In the latter part of August XOP dropped sharply for five days as it made a convincing new low at $32.64 on August 25th. Though the volume was heavy on the decline it was even greater on the ensuing oversold rally as XOP bounced 17.6% in just three days.
This low then became an important level to watch as XOP again drifted lower in September and eventually made a new low at $31.64 on September 28th forming a doji. The lower lows on the daily chart, line a, suggested the downtrend was still intact. The next day XOP closed above the doji high thereby triggering a high close doji buy signal (HCD).
This new low in price was accompanied by lower volume than the August low. The lower level of selling was also confirmed by the on-balance-volume (OBV) as it formed higher lows, line c. Just three days after the low the downtrend in the OBV, line b, was broken. This confirmed the bullish divergence in the OBV.
By October 8th XOP was testing its daily starc+ band (point 1) signaling that it had entered a high risk buy level. The initial correction took XOP down to $37.41 which was just over an 8% pullback from the high.
The rebound last week tempted some to buy but the corrective pattern did not yet look complete. The 3.7% decline on Monday indicated that the correction was not over. The 20 day EMA at $37.34 and the minor 38.2% Fibonacci retracement support at $37.23 are not far below Monday’s low. The more important 50% support is at $36.13.
So what are the potential profit targets for XOP once it completes its correction? The recent high at $40.80 just slightly exceeded the 38.2% Fibonacci retracement resistance from the April high at $40.75.. A next rally should take XOP above this prior rally high.
The 50% retracement resistance stands at $43.61 with the 61.8% resistance at $46.46. If the next rally is equal to the rally from the September 28th low to the October 9th high then the 100% or equality target is at $46.57 which is just above the Fibonacci resistance.
These potential targets can be very useful in determining the risk you are willing to accept on new long positions. I also use this type of analysis in determining the strike prices for vertical call spread positions.
What to do? Now that XOP is close to the 20 day EMA at $37.28 as well as the quarterly pivot at $37.04 XOP appears to be close to completing its correction. The current decline is viewed as a buying opportunity.
The spate of weak economic data appears to have shortened the market’s pullback as the major averages, including the beaten down financial stocks posted strong gains last Thursday. It looks like some of the hedge funds were scrambling to covered their short positions. The higher weekly close provides additional evidence that the October 2nd low did mark a market bottom that could last until the end of the year.
The NYSE Composite has next resistance at 10,589 which corresponds to the 61.8% Fibonacci retracement resistance and the weekly downtrend, line a. There is initial support now at 10,350 with the rising 20 day EMA at 10,175.
The strong A/D numbers had previously pushed the weekly NYSE A/D line above its flattening WMA on October 9th. The NYSE A/D line now needs to move through the resistance at line b, to signal a change in the intermediate term trend. As I noted last week (Should You Be Buying The Dip?) the sharply rising daily A/D lines was also consistent with a sustainable market rally that could surprise the majority.
The continued softness in the manufacturing sector and what many consider a misguided Fed policy have given the market skeptics even more reasons to worry about the health of the stock market. Since the start of the bull market it has been clear that too many politicians think that the economy is predictable. That is why they are still convinced there will be catastrophic consequences if the Fed does not raise rates now.
At the start of the bull market the US deficit was the focus of many economists that feared the consequences of both the TARP and the subsequent quantitative easing programs. Last week’s data reveals that the deficit has reached the lowest level since Obama took office. It is now back to the level last seen in September 2007 as the steady growth in revenues has had a tremendous impact.
Of course this data comes as we are getting closer to another fight over raising the debt ceiling. The Treasury commented last week that they will run out of money by November 3rd. The continued disarray in the House of Representatives makes another fight over the debt ceiling a real possibility.
Also last week we learned that the overall inflation rate is near 0%. The strong dollar and lower energy prices contributed to the second monthly decline in a row. The continued low inflation means that those on Social Security will not receive a cost-of-living adjustment for the 3rd time in the last ten years. The persistent low inflation rate and the threat of deflation in the Euro zone are keeping the Fed from raising rates.
Though this is the official inflation rate most of us in the real world understand that there is plenty of inflation. One only has to look at college tuition or medical costs in order to question the real inflation numbers.
Adding to the market’s nervousness is the earning’s season as most analysts have continued to lower their earnings forecasts. FactSet is now looking for a 5.5% year to year decline in third quarter earnings. They are looking for a 64.5% decline in earnings of energy companies and a 13.7% drop in the earnings of material companies.
Though most of the companies in these two sectors have not yet reported I think there is a good possibility that earnings will not be as weak as expected. In the 2nd quarter the actual earnings for the S&P were much better than they estimated.
The markets also do not seem to be listening as since the low on September 29th the S&P 500 Materials Sector has gained 12.7%. The daily relative performance has turned positive but a further rally is needed to turn the weekly RS analysis positive.
Once again the latest Retail Sales data disappointed the markets as it was up just 0.1%. It was depressed in part by the weak sales at gasoline stations which were down 3.2%. Motor vehicles were much better up 1.7% with restaurant sales gaining 0.9%. But according to Econoday the numbers are not that bad as they said “Looking at adjusted year-on-year rates helps clarify the trends. Excluding gasoline stations, retail sales are up a very respectable 4.9 percent which is well above the less impressive 2.4 percent gain for total sales.”
Business Inventories were flat last week while the Empire State Manufacturing Survey was down sharply and weaker than expected. Also lower than expected was the Philadelphia Fed Business Outlook Survey which was the second consecutive monthly drop.
Industrial Production was also weak at 0.2% on Friday but the Consumer Sentiment beat expectations as it came in at 92.1 while the majority were looking for 89.5. This was the best reading since the middle of August but the month end reading will be more important.
This week we have quite a bit of data on the housing market. The iShares US Home Construction ETF (ITB) has been beating the S&P 500 so far this year as it is up 5.43% YTD. It is currently in a short term downtrend but it will be interesting to see how ITB reacts to this week’s data.
The Housing Market Index is out on Monday followed by Housing Starts on Tuesday. On Thursday we get the latest report on Existing Home Sales, along with the all important Leading Indicators and the Chicago Fed National Activity Index. The flash PMI Manufacturing Index is out on Friday.
Interest Rates & Commodities
The yield on the 10 Year T-Note dropped below 2% last Wednesday before rebounding slightly but they were still lower for the week. A weekly close back above 2.14% is needed to suggest higher yields. The weekly and daily technical studies still favor lower yields.
Over the past three weeks the SPDR Gold Trust (GLD) has rallied over 6% which has gotten quite a bit of attention. The resistance from earlier in the year, line b, has been overcome. The next resistance is at $116.26 and the weekly starc- band with the downtrend from 2014, line a, in the $119 area.
The volume in the gold futures has been low on the rally but it picked up last week in GLD. The on-balance-volume (OBV) has just moved slightly above its WMA but is still well below the converging resistance, lines c and d. The daily studies are positive but are not that impressive. This suggests the current rally will likely ultimately fail.
Crude oil reversed last week and closed down over $2 per barrel. It was higher on Friday as it triggered a high close doji buy signal. A close in the December contract above $49 on strong volume should complete a short term bottom.
Despite the concerns facing the market the sentiment of consumers and investors is not that negative. The latest survey from AAII showed a slight decline in the bullish% from 37.5% to 34.1% which is still quite high. The bearish % dropped 1% to 27.1% which is still well below the long term average of 30.3%.
Though the Spyder Trust (SPY) closed up 0.45% on Friday on a weekly basis the major averages are mixed. The Dow Industrials were up 0.77% while the S&P 500 gained 0.90% while the utility stocks led with the Dow utilities up 2.33%. The Nasdaq Composite had a nice gain of 1.16%.
The Dow Transports were hit hard as it was down over 2% for the week and the mid and small cap stocks showed small losses. On a weekly basis there were more stocks advancing that declining.
The daily chart of the Spyder Trust (SPY) shows the strong close Friday with next chart resistance, line a, in the $205 area. The daily starc+ band is now at $206 with major resistance in the $210-$211 area. There is initial support now at $201 with more important at $198.94 which was Wednesday’s low.
The S&P 500 A/D line closed the week above the prior high, confirming the uptrend as the major resistance, line b, was overcome two weeks ago. The weekly A/D line (as noted last week) had moved back above its WMA last week. The OBV is also back above its downtrend, line c, but still lagging prices.
The Powershares QQQ Trust (QQQ) was able to close above its weekly downtrend, line a, with Friday’s close. The next weekly chart resistance is in the $109-$111 area with the quarterly projected pivot resistance at $115.74. There is initial support now at $107-$107.50 with the rising 20 day EMA at $105.47.
The weekly Nasdaq 100 A/D line has moved further above its WMA and the downtrend line b. This is a sign of strength that indicates the rally can continue. The weekly on-balance volume (OBV) made another new rally high last week as it moved above the long term downtrend, line c, two weeks ago.
The technical studies on the SPDR Dow Jones Industrial (DIA) continue to look very strong while the iShares Russell 2000 (IWM) still looks weaker.
What to do?
The pullback last week was a bit more shallow than I expected but hope some of you added to your ETF positions last week. Most analysts still seem skeptical of the rally and this is a good sign as it means the rally is likely to go even further than expected.
Given the how difficult it is to predict how the market will react to earnings ETFs are still favored as they will help cushion your portfolio against a drop in any one stock. I would not be chains either the utility or REIT ETFs at current levels as they are overextended currently. I am looking for signs that the correction in the health care sector is over and the biotech sector appears to have bottomed last week.
After the Dow closed higher for seven days in a row a pullback not surprising. The declining volume also suggested the rally was losing upside momentum. The market’s corrections hit the Dow Transports the hardest as it was down 2.22% while the Russell 2000 fell 1.42%. The S&P 500 was down just 0.68% as it was a bit weaker than the Dow’s 0.29% loss.
The market internals were more than 2-1 negative which has caused the sharply rising A/D lines to turn lower. After the close earnings from JP Morgan Chase (JPM) were weaker than expected and though Intel (INTC) beat expectations their profits were down. Unexpected weakness in China’s consumer inflation data overnight pushed the Asian markets lower and Euro zone markets are also down slightly.
The S&P futures are flat in early trading as many are suspicious of the recent rally and wonder whether it has just set the stage for another sharp market decline. The positive signs from the NYSE A/D line after the October 2nd reversal did favor a rally last week (A Market Turn This Week Will Surprise Many) and they also suggested that the market had made an important turn.
Therefore a I think a further market correction will be a buying opportunity and the charts can help you target a entry level where the risk reward ratio is favorable.
The Spyder Trust (SPY) closed below last Friday’s doji low of $200.58 triggering a low close doji sell signal.
- The rally barely surpassed the September 17th high but has fallen well below the daily downtrend in the $205 area, line a.
- There is minor support now in the $198.50-$199 area with the 20 day EMA at $196.80.
- The 38.2% Fibonacci retracement support of the rally from the low at $186.93 is at $196.22.
- The SPY did close last week above the quarterly pivot at $195.06 which is an important level to watch on Friday’s close.
- The more important 50% support stands at $194.42 but we may not get that deep a correction.
- The S&P 500 A/D line broke its downtrend, line b, before turning lower.
- It is still well above its rising WMA which could be tested during a correction.
- The on-balance volume (OBV) is still acting weaker than the A/D line as it has just tested its resistance at line c.
The Powershares QQQ Trust (QQQ) has continued to outperform the SPY YTD as it is up 3.49% YTD while the SPY is down 1.14%. This is despite the continued weakness in the biotech sector
- The QQQ formed a doji on Monday and then came close to its downtrend on Tuesday, line d, before turning lower.
- The rising 20 day EMA is at $104.83 with the 38.2% Fibonacci support at $103.87.
- The monthly open is at $101.94 with the quarterly pivot at $100.13.
- The Nasdaq 100 A/D line formed a negative divergence at the May highs, line a.
- The A/D line broke slightly above this resistance on Monday and could correct back to its WMA.
- The daily OBV on the QQQ has just slightly overcome its downtrend, line f.
- Once the rally resumes the next major resistance is in the $109.50-$110.50 area.
What to do? The street’s outlook for the earnings season is pretty dismal but I would not be surprised to see a better earnings season than most currently expect. Nevertheless the individual stock earnings risk is high and therefore favor ETFs on a pullback.
In particular I will be watching market leaders SPDR S&P oil & Gas (XOP), Sector Select Materials (XLB) and Sector Select Industrials (XLI) . The 20 day EMAs should be tested on a pullback but would expect the 50% support levels to hold. For my intra-day market outlook follow me on Twitter