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The Week Ahead: With Weak Data Are Stocks Still The Best Bet?

Posted by on Oct 17, 2015

The Week Ahead: With Weak Data Are Stocks Still The Best Bet?

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.

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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.

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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.

The Economy

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.

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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.

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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.

Market Wrap

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.

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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.

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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.