There were signs after the close on Friday October 2nd that the market’s upside reversal was important. The strong action last week confirmed that the stock market had completed a short term bottom. Fortunately many on Wall Street do not seem convinced as many were looking for the rally to fail before the end of the week.
Even the increased global tensions with Russia and the Republican meltdown in the House did not seem to deter the buyers. In August I wondered whether the market’s correction was going to look more like 2011 or 2012?
In 2011, the NYSE started a sharp decline in July and made the initial low in early August as the debate over raising the debt ceiling resulted in a downgrade of US debt. The failure to act and then the last minute deal surprised the global markets as they concluded that Congress was not competent. The subsequent decline in consumer confidence clearly delayed the economic recovery.
The NYSE Composite made a closing low on Monday October 3, 2011 (line a) as many in September had predicted the start of a new recession. The following day stocks were sharply lower in early trading but then reversed to close the day higher.
However, the NYSE A/D line formed higher lows, line c. This bullish divergence therefore suggested that the market was bottoming. The break through the downtrend in the A/D (line b) confirmed the bullish divergence.
By the close on October 28th the NYSE had gained 18.9% from the closing low. The initial rally was followed by a 11.7% correction into a low on Black Friday. The market was led higher by the A/D line which was a bullish sign and the Spyder Trust (SPY) gained 16% in 2012.
In 2015, the NYSE Composite made a new closing low on Monday September 28th but the NYSE A/D line formed slightly higher lows, line g. Stocks were hit with more selling on Friday Oct. 2nd before the market reversed to the upside as the Dow went from down 258 points to up 200.
Last Monday the A/D line overcame it short term downtrend and further resistance at line f, was overcome on Wednesday. The sharp rise in the A/D line is a sign of strength with major resistance now at line e. The NYSE Composite has reached the 50% retracement resistance with the 61.8% Fibonacci retracement resistance and the downtrend (line d) in the 10,589 area.
Many have warned that October may be another tough month for investors but since 1990 the S&P 500 has closed positive seventeen times and was lower just eight times. The average October return for the S&P 500 during this period has been 1.38%.
It is even more interesting when you look at the performance in October after the S&P 500 was down in September.
Since 1990 the S&P 500 has closed lower in September twelve times and it was down 2.46% last month. Of these twelve instances the S&P 500 only closed lower twice in October with the largest drop being the 16.79% drop in the bear market year of 2008. There was only a minor loss in 1990.
In 2011, the 7.19% loss in September was followed by a 10.78% gain in October. A similar result this year is not out of the question as a further rally will force many to cover their short positions.
The latest FOMC minutes supported my view that deflation is a bigger concern than inflation. One of the reasons why the Fed did not raise rates was because inflation has been below its target level of 2% for the past three years.
Also a concern for Fed members is the recent softness in the job market as they are not sure whether it is a sign of actual softening in the economy. Many of the Fed Presidents have spoken out recently they are looking for rates to be raised before year end. Three Fed Presidents will be speaking on Columbus Day.
Another concern for the markets is the latest IMF report which estimated that over-borrowing by developed countries could be over $3 trillion dollars. They also have concluded that as much as 25% of China’s corporate debt is at risk of default.
The IMF is also concerned that forced sale of assets will mean what they call “fire-sale prices”. The WSJ article last Wednesday pointed out that China, as well as Russia, Taiwan and even Norway are selling US debt. In fact net sales in the year ending July hit $123 billion. This compares with a net purchase of $27 billion the previous year.
It was a light week for economic news as the ISM Non-Manufacturing Index last Monday dropped to 56.9. Still a solid reading. This was consistent with the PMI Services Index reading.
The banks are closed for Columbus Day but the stock markets is open though trading may be light. On Tuesday we get the NFIB Small Business Optimism Index which I compared last week to the Consumer Confidence Index.
On Wednesday we get the latest reading on Retail Sales along with the Producer Price Index and Business Inventories. The Consumer Price Index will be released Thursday as will the Empire State Manufacturing Survey and the Philadelphia Fed Business Outlook Survey.
On Friday we get Industrial Production and the mid-month reading on Consumer Sentiment from the University of Michigan.
This week will be important for the bond market as yields rebounded last week to resistance in the 2.10% area. A daily close back below the 1.989% level will signal a further decline in yields which does look likely.
The big headlines a few weeks ago about the panic selling in the emerging markets appears to have created at least a short term bottom. The Vanguard MSCI Emerging Markets ETF (VWO) was strong last week and closed up over 5.7% for the week. VWO has closed well above the quarterly pivot at $34.77 which is a positive trend signal.
The 20 week EMA is at $36.47 with the weekly starc+ band as well as chart resistance, line a, in the $37.69 area. The quarterly projected pivot resistance is at $39.05. There is short term support now at $34.07 and the rising 20 day EMA. The volume has been high as VWO was bottoming and the on-balance volume (OBV) is back above its WMA.
The commodity markets came back to life last week as the Reuters Equal Weight Commodity Index closed up 3.5% for the week. It is still down over 41% from the 2011 high. The weekly chart shows a well defined downward trading channel, lines a and b. There are no signs yet of a major bottom.
Crude oil also had a good week as the December contract closed just above $50 which was the highest close in twelve weeks. The quarterly projected pivot resistance stands at $57.47 with additional resistance in the $60 area.
The weekly OBV is still below its WMA while the daily OBV is positive. The HPI, which uses volume, open interest and prices has risen further but is still slightly below the zero line. The WMA has also turned up and the daily HPI does signal positive money flow.
The energy stocks had a good week though the rally appears to have stalled on Friday. This suggests we may see a short term pullback this week. The SPDR S&P Oil & Gas Exploration (XOP) now has short term support in the $36.37-$37.04 area. The daily OBV is positive while the weekly studies still need a further rally.
As we head into the first full week of the earnings season the expectations are very low. The strong technical outlook for the stock market is a sign that the earnings season may actually be better than most are expecting.
All of the major averages posted strong gains last week led by the Dow Transports (+4.8%) and followed by the small cap Russell 2000 (+4.6%). The Dow Industrials were up 3.7% which was a bit better than the 3.3% rise in the S&P 500.
The market internals were strong last week with 2871 stocks advancing and just 371 declining. The weekly chart of the Spyder Trust (SPY) shows that it closed well above the quarterly pivot at $195.06 and the 20 week EMA at $200.45. The weekly downtrend, line a, is now at $205.06. The former uptrend, line b, and the quarterly projected pivot resistance are now in the $208.40-208.65 area.
The weekly S&P 500 A/D line has moved back above its WMA and the downtrend, line c. This is a positive sign for the intermediate term. The A/D line has also turned up from the long term support at line d.
The PowerShares QQQ Trust (QQQ) closed up 2.4% last week after testing but not closing below the quarterly pivot at $100.13 on a weekly basis. The daily downtrend, line a, is now at $107.70 with the daily starc+ band at $109.59. The quarterly projected pivot resistance is at $115.74. Short term support at $104.48 and the rising 20 day EMA.
The Nasdaq 100 has broken slightly above the bearish divergence resistance (line b) that goes back to the May highs. The A/D line is well above its WMA which has now turned higher. The daily OBV is testing its resistance at line c. The weekly OBV (not shown) has broken the downtrend from the 2014 highs.
The technical outlook for the iShares Russell 2000 (IWM) does not look as strong as the SPY, QQQ or the SPDR Dow Industrials (DIA). All of these ETFs, except the QQQ, formed daily dojis on Friday which is a sign of indecision.
Last week the winners were the oil & gas (+8.2%), basic materials (7.4%) and industrials (5.7%). Only health care was down 0.20% for the week.
What to do?
The stock market performance last week fulfilled the requirements I laid out last week when I said ” The stock market now needs to continue higher to confirm the positive divergences as the A/D numbers will be quite important. Two consecutive higher closes should start to worry the market bears as most media analysts are quite negative on the stock market.”
The improvement in the daily and weekly technical outlook suggests that the stock market has likely resumed its intermediate term uptrend. These readings do not suggest that this is just a oversold bounce that is part of the topping process. Nevertheless the rally should be monitored closely in the coming weeks for any hints of a rally failure.
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 earning’s shock in any individual stock. Keep in touch with my intra-day market outlook on Twitter and StockTwits.
A technical look at the stock market after last Friday’s close (Why Friday’s Reversal Was Important) indicated that an important turn may have occurred. The strong performance on Monday, especially the 7-1 lead of advancing stocks over declining stocks further supports this view.
The action looks similar to that on October 4th, 2011 when the market dropped sharply in early trading but then closed the day higher. From the Oct. 4th lows the Spyder Trust (SPY) rallied 20% in just the next seventeen days as those on the short side were squeezed as just befoire these lows the bears were out in force.
The stock index futures are a bit lower ahead of the US market opening On October 6th even though the German Dax, CAC 40 and FTSE 100 are all slightly higher. Though many of the major averages closed near the daily starc+ bands the technical action suggests some early softness in prices may be met with afternoon buying.
A look at the market internals makes it clear that the next two days (October 6th and 7th) closing prices will be important.
The NYSE closed at the daily starc+ band and a close above the September 17th high at 10,362 will certainly worry those on the short side.
- There is further resistance now at 10,700 (line a) and the 20 day EMA at 9970 is now trying to turn higher.
- After Friday’s close I noted the bullish divergence (line d) in the NYSE A/D line as it did not make a new low last week even though the NYSE Composite had closed below the August low.
- The A/D line has not broken its downtrend from the July lows, line c, which is a positive sign. A move in the A/D line above the September highs would be bullish.
- The McClellan oscillator formed a strong positive divergence at the lows, line f.
- The Oscillator has now surpassed the resistance at line e, which confirms the divergence.
The Spyder Trust (SPY) gapped above the quarterly pivot at $195.06 with the daily starc+ band at $199.06.
- The downtrend on the daily chart, line g, is in the $205 area.
- The S&P 500 A/D line has turned up from support and moved above its WMA and teh initial downtrend, line i.
- There is more important resistance for the A/D line at line h.
- The OBV is acting weaker as it made lower lows last week (see arrow)
- The daily and weekly OBV are both now above their WMAs.
- There is minor support now in the $196.80-$197.40 area
What to do? I will be looking for a shallow pullback this morning but if the A/D ratios are neutral or slightly positive will be looking for a entry point in some of the ETFs as they are likely the safest play going into earnings season.
For an already weak stock market the poor jobs report on Friday put the sellers back in charge in early trading as the Dow was quickly down 258 points. The initial selling in reaction to the new concerns over the economy was met with good buying as the major averages spent the rest of the day moving higher.
The Dow industrials was able to close 200 points higher on Friday and managed a gain of 0.97% for the week. The S&P 500 was up over 1% while the small cap Russell 200 finished the week with a loss of 0.8%. The NYSE Composite gained almost 1.2% for the week but still there were 400 more stock declining than advancing. As I discuss in the Market Wrap section there is technical evidence now that Friday’s reversal was important.
The jobs data suggests that we may not see a rate hike this year which increase the anger of many analysts who fear that by waiting the Fed will not be able to combat an increase in inflationary pressures. Some of the same experts have been attacking the stimulus plan since the financial crisis. They have been warning about ballooning debt and an inflationary surge.
As I commented in October 2012 “The fiscal conservatives favor more austerity, as they conclude that our increasing debt levels have to result in much higher inflation. Many are hoping that this will be like 1980, when Reagan’s election spawned a 20-year bull market.”
Few realize that in terms of percentage change Reagan by far had the greatest percentage increase in public debt than any of the other past eight presidents. Though his term is not yet over it seems unlikely that Obama will surpass his predecessor before he leaves office.
After following the Japanese economy and stock market since it peaked in 1989 I have always been more concerned about deflation. The report early Friday that Euro zone Producer prices had dropped 2.6% from a year ago suggests that this is a valid concern. Euro factory prices also dropped more than expected.
It was also reported by Eurostat last Wednesday that consumer prices on an annual basis fell in September for the first time since the ECB began its stimulus program. Weak data from purchasing managers caused Chris Williamson, chief economist at Markit to comment that “Deflation worries will intensify and put pressure on the ECB to act more aggressively.” The Euro zone inflation rate is still in a clear downtrend and well below its target level of 2%.
Several emerging market central bankers are also hoping the Fed will raise rates but higher US rates are likely to put even more pressure on their already weak currencies and economies. So far in 2015 over $500 billion has flowed out of emerging markets.
In fact on Thursday the Institute of International Finance projected that capital inflows to the emerging markets will turn negative this year for the first time since the late 1980’s. Both the ECB and Federal Reserve have already expressed their concerns that this could be even more of a drag on the US economy.
Given these global economic pressure the disappointing jobs data for September and the downward revisions of the previous months further raised the concerns of investors. This has pushed the average monthly change in non-farm payrolls well below the 2014 average which is not an encouraging trend.
The jobs data is normally quite volatile and while one should not place too much importance on any one month it does make the jobs data in the next few months much more important. It was not surprising that most of last week’s data on the US economy last week was weaker than expected.
Pending Home Sales fell 1.4% in August and the S&P Case Shiller Housing Price Index also declined in July. With the downward revision of June’s report this is the third declining month in a row.
The manufacturing data continues to be disappointing as last Monday the Dallas Fed Manufacturing Survey was quite weak at -9.5. The Chicago PMI on Wednesday dropped below 50 while the ISM Manufacturing Index dropped to 50.2.
This was the lowest reading since March 2013 with new orders at the lowest level since 2012. The chart of the ISM Manufacturing shows that the support from 2012, line a, was broken early in the year. With the latest reading it now is in a short term downtrend. The ISM for Chicago also peaked about a year ago and has formed lower highs (line b). The readings for the rest of 2015 will be important.
The one bright spot was the Consumer Confidence for September at 103 as it was better than expected 96.0 reading. Both it and the NFIB Small Business Optimism Index are still in their up trends. It would take a drop below the 2014 lows to call these trends into question.
This week we have the ISM Non-Manufacturing Index along with the PMI Services Index on Monday. Over the past few months the services data has been better than manufacturing with the ISM at 59 last month.
The latest report on International Trade is out on Tuesday with the release of the FOMC minutes on Thursday. September Import and Export prices are out on Friday and they are often give one a good reading on inflation.
Interest Rates & Commodities
In reaction to the jobs report the yield on the 10 Year T-Note dropped below 2.00% which the weekly/daily technical studies have been suggesting for several weeks. The weekly starc- band stands at 1.780% with the next strong support at 1.649%.
The short term support on the yield chart, line b, was broken about seven weeks ago. This coincided with a negative signal from the MACD and MACD-His. As I noted last week the daily studies had also turned back to negative.
The commodity markets stabilized late in the week as the 30% plunge in the price of commodity giant Glencore last Monday certainly had the market’s concerned. The dramatic widening of their credit default spreads called into question the viability of the company.
Gold prices rallied sharply on Friday but there was little improvement in the weekly technical outlook that was discussed last week. For the SPDR Gold Trust (GLD) there is key resistance in the $112 area.
Crude oil managed to close higher for the week as prices have been in a trading range for the past month. A daily close in the December contract above $48.50 would be a positive sign.
The sentiment picture did improve a bit last week as the % of bearish investors according to AAII jumped over 10 points last week as 39.9% are now bearish. The bullish% dropped to 28.1% but is still above historically low levels in the 20-22% area.
According to option expert Larry McMillan the Total put-call ratio “has also generated a buy signal, and that is usually a powerful one – calling for an $SPX rise of at least 100 points”. A very high level of put buying is a sign of very high bearish sentiment.
The daily chart of the NYSE Composite shows Friday’s close above the 20 day EMA which is trying to flatten out. A weekly close back above the quarterly pivot at 10,113 would be a positive sign with further resistance now at 10,250. The daily downtrend, line a, and the quarterly pivot resistance stands in the 10,628-10,718 area. This is 6.6% above Friday’s close.
The new closing low in the NYSE on Monday was accompanied by a higher low in the NYSE A/D line as noted by line e. This bullish divergence is what one would typically see at a market low. The A/D ratios ended 3-1 positive on Friday which has pushed the A/D line above its WMA. To confirm the bullish divergence the A/D line now needs to move above the downtrend, line c, and the September high.
The McClellan oscillator has also formed a significant bullish divergence as it has made sharply higher lows, line g. A move above the resistance at line f, will confirm the divergence. When using divergence analysis it is important to focus on the closing prices not the intra-day highs or lows.
Over the past 30 years I have relied on the NYSE A/D line to determine the market’s trend as the A/D line data on the S&P 500, Dow Industrials, Nasdaq 100 and Russell 2000 has only been available since 2009. These A/D lines did not form bullish divergences last week but have turned up sharply.
The Spyder Trust (SPY) closed well above the 20 day EMA at $193.41 with next chart resistance, line a, in the $200.50 area. The close was just below the quarterly pivot at $195.06 so this week’s close will be important. There is short term support now at $189.12 which was Friday’s low. A close back below this level would be negative.
The SPY formed a doji on Tuesday at the daily starc- band as it was in a high risk sell area. The Wednesday’s close above the doji high triggered a high close doji buy signal. The SPY did not make a new closing low last week and the S&P 500 A/D line did make slightly lower lows, line d.
The A/D line rose sharply Friday and is back above its WMA and is close to breaking its short term downtrend, line c. The A/D line has more important resistance at line b, and a break above this level would be an intermediate term positive signal. The OBV also formed lower lows, line f. It is now back above its WMA with key resistance at line e.
Over the weekend I will be providing charts of the SPDR Dow Jones Industrials (DIA), Powershares QQQ Trust (QQQ) and the iShares Russell 2000 (IWM) on Twitter and StockTwits.
What to do?
The stock market now needs to continue higher to confirm the positive divergences as the A/D numbers will be quite important. Two consecutive higher closes should start to worry the market bears as most media analysts are quite negative on the stock market.
Both the SPDR Dow Jones Industrials (DIA) and Powershares QQQ Trust (QQQ) closed on Friday above their quarterly pivots which is a positive sign. The stock market typically bottoms in the first week of October. Historically October is a positive month for all of the major averages with the Dow Industrials doing the best.
If the bullish divergences are confirmed this is likely the start of the rally have been looking for over the past few weeks (Make Your Fall Portfolio Plans Now). The strength of the rally will be important factor in determining whether this rally is part of the topping process or whether the market has formed an important low.
The utilities and REITS continue to show the best relative performance but it will be important for investors to monitor their holdings as the market continues higher. Those stocks or ETFs that perform worse than the S&P 500 should be sold when they reach important resistance.