The stock market was generally higher last week led by the 2.3% gain in iShares Russell 2000 (IWM). This was impressive compared to the 0.4% gain in the S&P 500 or the 0.14% loss in the Dow Industrials. The Dow Transports fell 1.0% while the Dow Utilities lost 1.4% for the week. Nevertheless the advancing stocks led the declining stocks by a healthy 2 to 1 margin.
In a holiday shortened session on Friday the US market seemed to ignore the 5.5% drop in the Shanghai Composite and the 2% drop in Hong Kong’s Hang Seng Index. This could still be a problem on Monday if the selling in the Asian markets continues on Sunday night.
The strong performance by IWM was consistent with the improving daily technical studies and positive seasonal trends I reviewed in last week’s “Don’t Give Up On These Stocks”. Of course the seminal work on what is commonly referred to as the January effect was published in 1942. This report by Sidney B. Wachtel “Certain Observations on Seasonal Movements in Stock Prices” can still be found at Chicago Journals.
Basically this seasonal trend is attributed to tax loss selling of small caps in mid-December followed by new buying as we enter the new year. An expanded look at the weekly chart of the iShares Russell 2000 (IWM) goes back to 2011 and shows that the seasonal low has ranged from November 25th through November 20th.
Typically IWM forms a short term peak in the middle of January and then declines until the middle of March when IWM again starts to rally.
For example the IWM made its fall low during the first week of October 2011 and gained over 10% before the seasonal trend low on November 25th. By the first week of February the following year the IWM had gained 39%.
In 2012 the IWM bottomed in the middle of November which was one week before the seasonal low on November 23rd. By the first week of January IWM was already up 16% and at the late February highs it had a gain of 22.8%. In 2013 the rally lasted until late March before there was a significant correction.
The gains were not quite as strong in 2013 as from the early October low to the high in January 2014 IWM was up 14.3%. The following October the IWM made its low on October 15th and by the first week of January 2015 had already gained 17.7%.
Since the low in early October 2015 the IWM is already up 11.8% and appears to still have significant upside potential going into the early part of 2016. The close on Friday was right at the November high, line a. As I noted in an 11/26 Tweet the Russell 2000 A/D line broke through its resistance on Wednesday November 25th. This suggests that prices should follow.
The daily and weekly OBV are both above their WMAs but the volume last week was not that impressive. A couple of days with much better volume (>35 million) would help support the bullish case. The daily relative performance has broken its downtrend, line b, and has moved above its prior high completing the bottom formation. This indicates IWM is becoming a market leader.
There is next resistance for IWM at $121.50 with the monthly pivot resistance at $124.17. The weekly starc+ band is at $126.20 with the June high at $128.17. The 20 week EMA is at $117.20 with the 20 day EMA now at $116.96. The quarterly pivot at $114.19 is a key level of weekly closing support.
The Direxion Small Cap Bull 3x (TNA) is a triple leveraged ETF that has monthly pivot resistance at $84.11 which is 10.7% above last Friday’s close. There is additional resistance in the $86.50-$88 area (line c) and then at $94.
The weekly OBV has moved back above its WMA and the weekly relative performance analysis appears to be completing a bottom. There is initial support now in the $73.50 to $71.36 and the 20 day EMA.
More of the same last week on manufacturing as while the Chicago Fed National Activity Index was a bit better than expected the PMI Flash Manufacturing Index and Richmond Fed Manufacturing Index were weaker. The Durable Goods was a bright spot with new orders up 3%.
Both New Home and Existing Home Sales were down slightly. This Monday we get the latest data on Existing Home Sales.
The monthly Consumer Confidence last week came in at a dismal 90.4 from the prior month’s revised reading of 99.1. The decline was apparently due in large part to a lowering of optimism about the job market. It was well below the consensus range of 96.2 to 102.
The chart shows that in the past the breaks of the long term support has often coincided with the start of a recession. in 1999 the Consumer Confidence started to fall sharply and eventually dropped below support at line a.
The Consumer Confidence was much weaker during the 2003-2007 recovery as it peaked well belwo the 1999 highs. The pattern of higher lows, line b, was violated just before the start of the recession. The chart shows that there is current support now in the 85-87 area while the uptrend is much lower in the 68-70 area, line c.
The Consumer Sentiment data from the University of Michigan ended the month at 91.3 which was below the mid-month reading of 93.1. It was encouraging that the current conditions component showed little change as we enter the all important period for consumer spending.
After the holiday weekend we get the Chicago PMI and the Dallas Fed Manufacturing Survey which will be followed on Tuesday by the PMI Manufacturing Index as well as the ISM Manufacturing Index.
Ahead of the monthly jobs report on Friday we get the ADP Unemployment report on Wednesday as well as Productivity & Costs. Thursday we get the PMI Services Index and Factory Orders.
The action last week was not that impressive though the rebound from the mid-month lows has reduced some of investor’s fear. According to AAII the bullish% rose 1.4% last week to 32.4% while the bearish% fell 4.5% as 1.6% moved back into the neutral camp.
Last week’s data on the consumer indicates they are now less optimistic than they were at the start of the fall. The full slate of economic data this week culminating with Friday’s jobs report will once again turn the focus back on the FOMC meeting on December 15-16.
The monthly, weekly and daily technical studies are positive for the stock market though they have started flattened out over the past week or so. Therefore in order to rule out a near term pullback the market needs to prove itself on the upside this week.
December is historically one of the best months as for the last seventy years it has averaged a 1.8% gain. Using Friday’s close at 2090 this means the S&P 500 could close the month in the 2125-2130 area. So far the S&P 500 is up about 0.5% in November which is what seemed reasonable from a historical perspective in the middle of the month.
The oil & gas along with the consumer good stocks led the market last week, gaining 1.3% followed by a 1% rise in the health care stocks. Material and consumer stocks were both up around 0.3% while technology stocks lost 0.5%.
The monthly chart of the Spyder Trust (SPY) shows the strong close above the September doji high (see arrow). This high close doji (HCD) buy signal was first identified and written about by John Person. The monthly starc+ band stands at $227.60 with the 20 month EMA at $202.47. There is major support on the monthly chart in the $178-$171 area.
The monthly S&P 500 A/D line is above its WMA and now very close to last May’s highs, line b. An upside breakout this month would be a very positive sign for 2016. The monthly OBV does not look as strong as it has just rebounded back to its declining WMA. The OBV resistance at line c needs to be overcome to turn it positive. There is important OBV support now at line d.
The weekly chart shows there is now strong resistance in the $211.60-$212 area. If it is overcome then the SPY could reach the monthly pivot resistance at $217.28. The 20 week EMA held on the recent correction and now represents major support at $203.27.
The weekly S&P 500 A/D line is still just below its downtrend, line f. It will be important that the A/D line hold above its WMA and the support at line g, on any correction. The OBV has been acting stronger than prices for the past month when it moved above the 2014 highs.
The Powershares QQQ Trust (QQQ) was down slightly for the week as it is just below the early November high all time high at $115.47. For December the pivot resistance stands at $119.08 with the weekly starc+ band at $123.93.
There is short term support at the $112.96 and the 20 day EMA. There is further support and the 20 week EMA in the $109-$109.50 area. The weekly starc- band is at $102.58.
The Nasdaq 100 A/D line failed to make a new high with prices in early November (line b). There is now key support at the mid-November low and at line c. A break below this level would quite negative.
The weekly on-balance volume (OBV) bottomed out at the end of September and is still well above its rising WMA. It is still below the September 2014 high. The daily A/D lines and OBV (not shown) are above their WMAs but are not currently showing any burst of upside momentum.
What to do?
The flat action in many of the technical studies allows for either a overall market correction or a period of sector rotation where the small cap stocks could shine. The narrow price action does not favor establishing new low positions in the market tracking ETFs at current levels as they are too far above support.
I would favor the small cap stocks on a pullback and investors may want to look at the Royce Value Trust (RVT) . It is a closed end fund that is currently down 8.6% YTD. It has done well over the long term under the guidance of Chuck Royce. It closed Friday at a significant discount to its net asset value and has key support in the $11.80 area.
It is clear from the monthly studies that the December close may have important implications for the start of 2016. So while my outlook is still positive investors should not relax. Be sure that you have a clear plan for your portfolio and stick with it if the market corrects.
Editor’s note: If you like Tom’s analysis and want specific entry/exit advice on ETFs check out ViperETF.com, his premium newsletter.
Monday’s overnight concerns over the downing of a Turkish jet triggered some early selling but the buyers stepped in after lunch as the Dow Industrials and &P 500 closed with minor gains. The Russell 2000 did much better as it was up 0.72% while the mid-cap stocks were not far behind. The futures are slightly higher in early trading.
The iShares Russell 2000 (IWM) has lagged the Spyder Trust (SPY) by about 2% since the late September lows . It was the weakest of the market tracking ETFs at the correction lows but from a technical standpoint the IWM started to look better at the end of the month. Strength in these stocks would be a positive for the market and would also erase one of common market concerns.
The weekly chart of iShares Russell 2000 (IWM) shows that it seasonal bottoms on November 20th, line 1, and the downtrend in the seasonal trend is broken in the middle of December. Typically the seasonal strength lasts until early January.
The IWM has been trading above and below the 20 week EMA for the past four weeks and it is now at $117.04. The 61.8% Fibonacci retracement resistance from the June highs is now at $120.15.
If it is decisively overcome then we should see a move to the $125-$127 area with the weekly starc+ band at $125.78.
The daily chart of IWM has resistance now in the $120 area, line b, with the former uptrend (dashed line ) at $123.50.
The Russell 2000 A/D line has moved further above its WMA but needs to surpass the resistance at line c, to generate a stronger buy signal.
The daily OBV has slightly broken its downtrend, line d, but a strong close on volume of over 42 million shares would be much more positive.
The daily relative performance (not shown) now appears to have bottomed consistent with a new market leader.
There is minor support now in the $115.50-$117 area and the monthly pivot at $113.20 held on the recent pullback.
What to do? New long positions in IWM were recommended to subscribers of the Viper ETF Report at $115.85 in late October. For those not yet long I would advise waiting for a breakout in the A/D line and/or a strong close above $120.25 before looking for a new entry.
The stock market reversal the week of November 9th through the 13th surprised many investors as well as analysts and did some short term technical damage. As I noted last week this made the action early last week quite important.
A sharp oversold rally was likely after the selling on November 12th but last Tuesday the rally appeared to have stalled as the market gave up its early gains. The weak close set the stage for another wave of selling last Wednesday but instead the market put in a very strong performance as the FOMC minutes triggered even more buying.
As I discuss in the Market Wrap section this week’s strong close maintains the positive momentum generated from the October 2nd reversal low. This further calls into question the August and September warnings of a new bear market and a recession.
For example, Citibank’s chief economist Willem Buiter was quoted in September as saying “A global recession starting in 2016, led by China is now our Global Economics team’s main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing.”
However, last Thursday’s release of November’s Leading Economic Indicators (LEI) indicates that stock investors should not be concerned about an imminent recession. The November reading at 0.6% according to Econoday ” is a sudden indication of acceleration ahead”.
The chart of the LEI now shows a clear resumption of the uptrend and from a historical perspective this is quite important. For example in early 2000 the LEI peaked (line 1) which was well ahead of the official start of the recession in March 2001. The LEI also gave an excellent warning in the spring of 2006 when the LEI also turned lower, line 2. This was twenty months ahead of the recession’s official start in December 2007.
In past columns I have referred to the excellent charts from dshort.com showing how the LEI typically peaks well ahead of the start of a recession (see chart). Investors who are avoiding stocks because of recessionary fears now have strong evidence from the LEI that a new recession is not yet on the horizon.
By comparing the LEI chart with the S&P 500 investors can gain additional insight into the markets major trend. From the latter part of 2003 until 2006 the LEI was in a strong uptrend as it improved each month.
The chart of the S&P 500 reveals that it developed a flag formation , lines a and b, that was completed in November 2004. As the S&P 500 was correcting the weekly NYSE A/D line (in purple) was acting much stronger than prices as it had already moved to new highs several months earlier in July 2004.
The A/D line continued to form higher highs in 2005 and 2006 as it made further new highs in May as the LEI was topping out. The A/D started to surge again in the fall of 2006 as the S&P 500 rose from the 1260 to over 1550.
The NYSE A/D line peaked in June 2007 and then made lower highs in July. As the market was making its bull market high in October 2007, the A/D line formed even lower highs, line c. By the end of November the A/D line had dropped below the August low thereby forming a new downtrend which confirmed that the bull market had topped out.
The weekly NYSE A/D line formed a short term divergence in May but since neither the S&P 500 or the NYSE Composite has yet surpassed the spring highs no longer term divergences have yet been formed. The potential for more serious divergences to be formed was discussed “Why New Highs Could Send A Warning”.
If the S&P 500 or Spyder Trust (SPY) were to make a new all time in the next few months it will be important that the new highs be accompanied by new highs in the A/D lines. To confirm new weekly uptrend in the A/D lines the October highs need to be overcome.
On Friday the ECB’s Mario Draghi expressed his concerns that the inflation rate could fall well short of its 2% target and he said ” we will do what we must to raise inflation as quickly as possible”. This makes further easing likely at the December 3rd meeting which should give the Euro zone as well as the global markets a boost.
Even though many of the US indices and the Stoxx Europe 600 posted better than 3% gains for the week it is important that the global markets become even stronger. The German Dax still needs to overcome the key 61.8% Fibonacci resistance at 11,220. It would also be helpful if the Shanghai Composite was able to now move back above the 3750 level.
In a recent special report for Viper ETF subscribers I pointed out how the regional and country specific ETFs can often be quite effective in giving your portfolio a boost. They trade quite well technically and therefore even a small commitment to these ETFs can have a big impact.
Since the early October lows the Materials Sector Select (XLB) has led the market higher up 16.4% as of Friday afternoon trading well ahead of the 11.27% gain in the Spyder Trust (SPY). As I noted in last week’s “Can Strong Sectors Weather The Storm?” the weekly technical outlook, including the relative performance analysis had identified XLB as a market leader.
The Industrials Sector Select (XLI) and the Consumer Discretionary (XLY) are both leading the SPY higher. The Health Care Sector Select (XLV) has continued to lag though there were signs last week that it may be ready to catch up with the other market leading sectors.
It was a another mixed week for manufacturing data as the Empire State Manufacturing Index was weaker than estimated at -10.74. Later in the week the Philadelphia Fed Business Outlook Survey came in better than expected at 1.9. This followed two negative months as it has moved slightly back into positive territory. The Industrial Production also was weak for the second month in a row. On Friday the Kansas City Fed Manufacturing Index rose for the first time since last February.
There was not much good news for the housing market as the Housing Market Index dropped two points while Housing Starts were down 11% in October. Permits were up which was a slight positive.
On Monday we will get the Chicago Fed National Activity Index, PMI Flash Manufacturing Index and Existing Home Sales. Then on Tuesday we get the preliminary reading on 3rd quarter GDP, as well as the S&P Case-Shiller Housing Price Index and Consumer Confidence.
This is followed on Wednesday by Durable Goods, New Home Sales and Consumer Sentiment from the University of Michigan. Of course the markets are closed on Thursday with a shortened session on Friday.
Interest Rates & Commodities
There was little change in interest rates last week as the yield on the 10 Year T-Note dropped slightly to 2.262%. The high yield market was a bit lower as the SPDR Barclays High Yield ETF (JNK) dropped slightly and is now not far below the early October lows.
Both gold and silver continued lower last week but the losses were not as bad as the prior week. They are looking a bit sold out and the sentiment analysis indicates that both are getting quite oversold. The Bloomberg Commodity Index peaked in June 2008 but has fallen from up 136% to down just over 18%. On a short term basis good the gap between prices and the 20 month EMA indicates the index is oversold which increases the odds of rebound. However there are no signs yet of a sustainable bottom .
The US averages posted solid gains last week as the S&P 500 gain of 3.3% was the best weekly performance of 2015. The Dow Transports and Nasdaq Composite did even better as they were up 3.6%. small caps are still lagging as the Russell 200 was up just 2.49%.
Advancing stocks led the decliners by a 2-1 margin with technology leading the parade as it was up 4.35 followed by a 3.6% rise in industrial stocks. Consumer goods and services were both up well over 3% with just a 3.1% gain in the financials.
The sharp decline two weeks ago dampened the bullish sentiment as AAII reported the bullish % dropped 3.5 points to 30.8% which is very close to the bearish % at 30.5%. The fear index or VIX also reversed sharply last week which is a positive sign. The CNN fear & Greed Index is still neutral at 54.
The weekly chart of the Spyder Trust (SPY) shows that the SPY held the 20 week EMA, now at $202.62, before closing strong. There is next resistance in the $213 area which if overcome could signal a move towards the weekly starc+ band at $221.99.
There is short term support now at $207.72 and the 20 day EMA with the daily starc- band at $203.80. As I noted last week the SPY had dropped below the daily starc- band on the recent correction. The weekly S&P 500 A/D line reversed back above its WMA last week which is normally a very bullish sign. A move in the A/D line above the resistance at line b, would further support the bullish case.
The weekly OBV continues to act very strong as it has already broken out to new highs. This continues to be in contrast to the daily OBV (not shown) which is below its WMA.
Though the weekly analysis of the SPY as well as the NYSE Composite looks strong the daily charts introduce a bit more caution into the short term outlook. In analyzing the daily chart of the NYSE Composite one cannot rule out the possibility that the rally from the October lows could be just part of a broad continuation pattern.
The downtrend from the May-June highs, line a, and the resistance at line b, are now converging in the 10,750 area. The 61.8% Fibonacci retracement resistance now stands at 10,587. The 20 day EMA and initial support is now at 10,384 while the quarterly pivot is at 10,113.
The NYSE A/D line is back above its WMA but does not look as strong as the weekly A/D line which turned higher after dropping back to its WMA a week ago. The daily A/D line needs to move above the early November high to reassert the market’s uptrend.
The SPDR Dow Industrials (DIA) and PowerShares QQQ Trust (QQQ) both are acting well basis the weekly and daily charts. The iShares Russell 2000 (IWM) rebounded nicely last week but needs to add further gains to suggest it is ready to accelerate to the upside consistent with the January effect. I will Tweet some charts of these over the weekend.
What to do?
Though I was a bit more cautious heading into last week the strong market performance suggests that many were buying the dip. Those that sold near the lows the prior week’s lows were punished by mid-week. This further validates the high risk of selling when the averages are below the daily starc- bands. Now we are entering a very strong seasonal period that generally last until the end of the year.
On a very short term basis the market could consolidate before a few days before it continues higher. New long positions as always need to be established with the focus on risk as stops for now need to be at least under the November 13th lows. I am looking in particular at health care and the emerging markets in the week ahead.
Editor’s note: If you like Tom’s analysis and want specific entry/exit advice on ETFs check out ViperETF.com, his premium newsletter.
After a rough week for the stock market the horrible events in Paris have put investors even more on edge. So far there has not been any heavy selling in the Euro zone markets though both the Japanese and Hong Kong markets were down over 1%. The S&P futures are down 3 points in pre-market trading.
The rapid reversal last week did cause technical damage that suggests the decline can go further. My comparison with the correction in 2011 (Will Stocks Correct Like 2011?) suggests the market may stay weak through the Thanksgiving day holiday.
The technical readings does suggest we will see a powerful rebound this week but it is likely to be followed by further selling. One question for investors is whether the material and industrial sectors, which led the market from the October lows, will emerge as the best sectors once the current decline is over.
The Material Sector Select SPDR (XLB) is still us 14.3% from the October lows which is much better than the current 8.3% gain in the Spyder Trust (SPY). The Industrial Sector Select SPDR (XLI) is also doing better than the SPY as it is up 9.3%.
The Material Sector Select SPDR (XLB) has an expense ratio of 0.15% which has 28 holdings and 65.7% in the top ten holdings which include Dupont (11.5%) , Dow Chemical (11.2%) and Monsanto (7.8%).
– The weekly chart shows that a doji was formed two weeks ago and the close on Friday below the prior week low triggered a low close doji sell signal.
– The quarterly pivot stands at $42.46 with the weekly starc- band at $40.53.
-There is resistance now at $46 with the weekly starc+ band at $48.86
-XLB was up 1.2% on Friday compared to a 1.1% loss in the SPY.
-The weekly relative performance is one of my favorite methods for trading ETFs and the RS analysis on XLB appears to have bottomed.
– A move in the RS line above the downtrend line a, would be even more positive.
– The weekly on-balance volume (OBV) formed a positive divergence, line b, at the recent lows.
– The OBV subsequently moved to new highs for the year and is well above its rising WMA.
-The daily analysis (not shown) is still positive for XLB.
Industrials Sector Select SPDR (XLI) also has an expense ratio of 0.15% with a total of 66 holdings. There is 48% in the top ten holdings which includes General Electric (12%), 3M (5.3%) and Boeing (5%).
-XLI closed last week just above the 20 week EMA at $53.21 with the quarterly pivot and more important support at $50.23. The weekly starc- band is at $49.69.
-The next resistance is at $55.50 and the weekly downtrend, line c.
-The weekly RS line shows a solid uptrend, line d, from the July lows and it rose sharply last week.
-This is a sign that XLI is a legitimate market leading sector ETF
-The weekly OBV dropped back below its WMA last week and has good support now at line e.
– The daily OBV on XLI (not shown) turned negative Monday and still looks corrective.
What to do? I will be looking for the daily studies to give positive signals ideally closer to the quarterly pivot where the risk can be well controlled. Based on Friday’s close in XLB it may not see a deeper correction but could just form a trading range while the overall market corrects.
Investors were clearly not impressed last week by the much better than expected jobs report as the major averages dropped below the prior week’s low on Monday increasing the focus on the downside. The selling increased on Thursday as many of the major averages dropped down to their daily starc- bands. As I warned last week a ” sharper correction is likely in the next couple of weeks”.
The market tone has not been helped by the comments from many Fed officials that point to a rate hike in December which the majority of economists are now expecting. The lack of consumer buying despite the much lower energy prices has been a surprise to many analysts.
In Augusts ” A Replay of 2011 or 2012?” I wondered whether the ongoing correction would look more like 2011 or 2012. As the decline became more serious it was clear that the market decline would be worse than what occurred in 2012. The market reversal on October 2nd was very similar to what happened in 2011.
Looking at the historical data after the market bottom was confirmed I pointed out that ” 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” .
The updated table shows the 8.60% gain in October 2015 but what does that mean for November? Since 1990 there have been four times when the S&P 500 was up more than 5% after declining in September. In 2011, the 10.79% gain was followed by a loss of 0.32% in November.
In 2003 the 5.50% gain In October was followed by a 0.71% gain in November. The market was quite volatile in 2002 as after dropping 11% in 2002, the S&P gained 5.64% in October which was followed by a 5.71% gain in November.
The only other occurrence of a weak September and a higher close in October was in 1999 when the S&P 500 gained 6.25% after the weakness in September. The October gain was followed by a rise of 1.92% in November 1999.
Since 1950 November has been a good month as it has averaged a gain of 1.37% as the S&P 500 was up 43 years and down 22 years. So for November 2015 I think it is reasonable to look for the S&P to record something between a 1.5% loss and a 1.5% gain.
A closer look at the NYSE Composite performance in the fall of 2011 reveals that after a rally of 22% from the October 4th low to the October 27th high there was a sizable correction. The SPY retraced 66% of the previous rally as it made its low on Black Friday November 25th.
The rally from this low was quite sharp peaked on December 6th as the SPY corrected once more. On December 22nd (line 1) the NYSE A/D line broke its downtrend, line a. This signaled that the correction was over and the NYSE gained over 8% in the next six weeks.
As of Thursday’s close the NYSE is down 38% from the high on November 3rd. If the NYSE were to undergo a similar correction as what occurred in 2011 the NYSE could drop down to the 9930 area, line c. This would mean a drop of another 2.8% from Thursday’s close which could take the SPY down to the $199 area.
Many of the other major global stock markets also hit resistance and turned lower last week. The German DAX Index reached a high of 11,055 on November 6th but closed Friday at 10,708. The rebound slightly exceeded the 50% retracement resistance at 10,860 but has failed so far to overcome the key 61.8% Fibonacci resistance at 11,220.
There is next support at 10,500 with the quarterly pivot at 10,262. The daily RSI formed a strong bullish divergence at the September lows, line b. The RSI has now dropped below its WMA and a drop below the bullish divergence support (line b) would be more negative.
Data last week on the Euro zone growth came in at 0.3% as Germany and France were hit by a decline in foreign trade. This makes it more likely the European Central bank will further ease their monetary policy at the December 3rd meeting.
The week’s key economic data came on Friday as Retail Sales came in at 0.1% which was weaker than the 0.3% that most expected. Though this reflects a slowdown from the prior month the sales data does show a year over year gain of 1.7%.
The Producer Price Index fell an unexpected 0.4% while most were looking for a 0.2% gain. Though energy prices were unchanged for the month they are down 21.5% for the year while food prices are down 4.2%.
The long term chart shows that the uptrend connecting the 2002 and 2009 lows, line a, was broken earlier in the year. The chart shows a clear downtrend now as it has made lower lows and lower highs. The long term support going back to the late 1990’s is still intact but from this chart deflation is still clearly a concern. It is the one factor that could keep the Fed from raising rate in December.
On the plus side Business Inventories on Friday were up 0.3% while many thought they would be flat. Also the mid-month reading on Consumer Sentiment from the University of Michigan was better than expected at 93.1.
This could be a plus for retail sales in November as the department stores like Macys (M) and Nordstrom’s (JWN) were hit hard last week, losing 20% and 17.9% respectively. My weekly relative performance has indicated that they have been weaker that the S&P 500 for the past month. This made them stocks to sell.
There is a full slate of economic data this week but the focus is likely again to be on Wednesday’s release of the FOMC minutes. Monday’s Empire State Manufacturing Survey is expected to be weak again this month as is Tuesday’s Industrial Production report. After last week’s PPI the expectations are low for the CPI but the Housing Market Index has remained strong all year and we get the latest data on Tuesday.
Housing starts are out on Wednesday followed by the Philadelphia Fed Business Outlook Survey and Leading Economic Indicators on Thursday. Further data on manufacturing Friday with the Kansas City Fed Manufacturing Index.
Interest Rates & Commodities
Despite the prevailing opinion that the Fed will raise rates in December the yield on the 10 Year – T-Note declined last week after testing the downtrend, line a. As discussed last week the daily/weekly momentum still favors a move higher in rates. Utilities were the only sector that closed higher even though the gains were small.
Crude oil and gold both dropped below the October lows with the January crude oil contract losing $3.50 per barrel or 7.6%. It now looks ready to test the August lows in the $40 area. The demand outlook for crude oil is still negative though bearish sentiment is also quite high so there may be some short covering if the summer lows are tested.
The SPDR Gold Trust (GLD) has already violated the July lows which is consistent with the negative technical signals that were generated several weeks ago. The weekly chart formation has downside targets now in the $100-$101 area.
The small caps gave up the most last week as the Russell 2000 dropped 4.43% which was considerably worse that the 3.6% drop in the S&P 500 or the 3.7% loss in the Dow Industrials. Of course the decline in some of the individual market sectors was even worse as the oil & gas stocks were down almost 6% for the week followed by a 5% decline in the technology stocks and a 4.4% decline in the consumer services sector.
The weekly chart of the Spyder Trust (SPY) shows a weekly reversal as the close was below the lows of the past two weeks. The 20 week EMA is a bit lower at $201.99 with the four week lows at $198.94. The quarterly pivot stands at $195.06.
The weekly S&P 500 A/D line has dropped back below its WMA which is a reason for concern. There is key support for the A/D line now at the September lows, line a. The NYSE A/D line has turned lower but is still slightly above its WMA but that could change this week. The weekly OBV on the SPY has turned down but is still well above the breakout level at line b.
The daily chart of the SPY shows that it closed below the daily starc- bands on both Thursday and Friday. The monthly pivot is at $202.16 which is just below Friday’s low. The daily S&P 500 A/D line dropped below its WMA last Monday and has since plunged sharply. The breakout level, line a, is now being tested.
The lower highs in the OBV, line b, have been followed by a sharp decline over the past week. The OBV is now well below its WMA so any bounce is likely to fail below its WMA.
The PowerShares QQQ Trust (QQQ) also formed a weekly reversal with next support at $108.54 and the 20 week EMA. The breakout level (line a) and further support are in the $105-$106 area. The close on Friday was below the daily starc- band.
The Nasdaq 100 A/D line failed to make a new high two weeks ago and has now dropped slightly below its rising WMA. To confirm this bearish divergence the A/D line would need to drop below the recent lows at line b.
The weekly OBV looks much better as while it turned lower last week it is well above its rising WMA. The weekly OBV broke its major downtrend, line c, in early October.
The iShares Russell 2000 (IWM) closed the week below the prior week’s lows which has called the recent bottoming action into question. The daily chart shows that a doji formed at quarterly pivot support which does favor at least a bounce over the near term. The 20 day EMA is at $116.21 with further resistance at $117-$118.
The weekly and daily charts of the SPDR Dow Jones Industrials (DIA) does look very similar to the other major averages. There is next good support in the $168.50-$170 area.
What to do?
The daily technical studies identified a good risk buying opportunity after the October 2nd reversal but the daily sell signals last week emerged very quickly. In last week’s column I commented that a ” sharper correction is likely in the next couple of weeks. Therefore if you have some nice open profits don’t be greedy, take some profits. Any correction is likely to create some new buying opportunities.”
The weekly reversals now warrant a more cautious approach over the next two weeks. The very negative A/D numbers last Thursday do favor a sharp rebound this week that could take the major averages and ETFs back to their 20 day EMAs.
This rally should provide an opportunity to get out of trading long positions and should give investors a chance to raise some cash. I hope you took the opportunity on Monday to sell some of your positions in those stocks or ETFs that have been lagging the S&P 500.
From an intermediate term standpoint the current correction needs to be over by early December to support the bullish case. With no clear signs of a recession this is still the favored scenario but a drop in A/D lines below the recent correction lows would be more negative. The horrible events in Paris could make investors even more nervous on Monday.
I will be monitoring the market action this week closely and will share my market thoughts during the week on both Twitter and StockTwits.