Are Markets Hitting the Ceiling?

This week found us in cash as the markets appear to be hitting the ceiling at approximately 1100 on the S&P 500. We remain in "Yellow Flag" mode and expect choppy prices ahead.

Chart courtesy of stockcharts.com

In the chart above you can clearly see the resistance level at 1100 and support at 1075 with the 50 Day Moving Average just below at 1046. On the lower graph, the MACD is curling back into a "sell" signal on the daily while the weekly still indicated positive momentum.

So clearly the rally is running out of steam for now and the only question that remains is if it can reignite itself and power through the 1100 level.

As we mentioned last week, 1121 is another significant resistance point in Fibonacci theory.

Short term, the % of stocks trading above their all important 50 Day Moving Average took a 10% decline on Friday to stand at 71%, down from over 90% in mid September.

And the Dow gave up the psychologically important 10,000 level after just reclaiming it last week.

We could see a rebound on Monday but overall choppy to declining prices are most likely ahead.

The View from 35,000 Feet

Weakness in the markets stemmed from housing starts being less than forecast in September and higher than expected initial jobless claims on Thursday.

Also building permits fell for the second time in 3 months and Burlington Northern (BNI), a bellwether transportation company, declined -8.4% on concerns over weak real shipments reflecting declining consumer demand.

Boeing (BA) was a significant earnings miss and concerns about overvaluation persisted with the S&P 500 now standing at 20 times operating earnings, its highest level since 2004.

On the positive side of the ledger, tech continued to shine with Amazon blowing away estimates and Microsoft (MSFT) putting in a good performance.

Overall, earnings are on track for an eighth consecutive quarter of declines, a record, and more bank failures on Friday pushed the total to 106 for the year, the highest since 1992.

This coming week will bring another avalanche of earnings reports from nearly 150 S&P companies including heavyweights like Exxon (XOM), Corning (GLW), Visa (V), Procter & Gamble (PG), General Dynamics (GD) and Chevron (CVX), all of which should give us more insight into the strength of the recovery.

Depending upon whom you read, we're either on the cusp of a crash or the dawn of a new bull market. Such is the nature of these confusing times.

My indicators still show an uptrend intact but with significant short term weakening.

The Week Ahead

Tuesday: Case/Shiller August Home Price Index

Wednesday: October Consumer Confidence, September Durable Goods, September New Home Sales

Thursday: Weekly Jobless Numbers, Q3 GDP

Friday: October Purchasing Managers Index, October Michigan Consumer Confidence Index

Sector Spotlight:

Leaders: Commodities, Hong Kong, China

Laggards: Home Builders

Disclosure: None

Comments

[Mad Hedge F...:]

sst Wow! Dow 10,000! It is definitely the year of the bungee cord. Of course, the GDP is now 40% higher, and the national debt, at $12 trillion, is more than double the first time the index crossed this magic number in 1999. Some are saying this is an indication of how cheap the market is. Some, but not all- including me. We have a “V” shaped stock market recovery discounting an “L” shaped economic recovery, a match made in Hell, which will come back to haunt us all. Bond fund subscriptions are outpacing stock fund subscriptions by 13 to one. Humongous amounts of cash prefer to sit on the sidelines in money market funds and short term Treasury bills yielding nothing. Insider buying is nonexistent. Only 85% of the population is participating in the economy now, if you use the broader unemployment statistics, and only 75% of you take out the “black” economy. It seems like much of the investing public has taken up the attitude of fool me once, shame on you. Fool me twice, shame on me. Sure you could strap on a long here and make a few bucks. Could you conceivably get away with it? Maybe. Is it a good idea? No. Making 10% on the upside at the risk of a 50% loss is not how great fortunes are wrested from the market. There is a time to play and a time to sit, and I vote for the latter. There is no law that says that you always have to trade, despite what your broker might say.

Oct 25 10:31 AM

[TradingHelp...:]

Earnings don’t drive stock prices nearly as much as sentiment does so I am paying less attention to Q3 earnings and lot more attention to the sentiment on this site, which is as good a proxy as any for shifting sentiment.

But that’s not to say earnings don’t matter. When earnings give investors a rising sense of confidence, they can be a powerful indicator of a sharp drop in market 1-2 quarters later. This was certainly true in 2000. Peak earnings coincided with the stock market’s all-time high and stayed strong right through the third quarter before finally succumbing to the bear market in stock prices. Investors who bought stocks based on strong earnings (and the trend of higher earnings) got killed.

elliottwave.com/r....

Oct 25 02:16 PM

[VP of Commo...:]

I prefer to keep an eye on P/E, specifically in terms of valuation. Right now I see a moderate to strong P with a very weak E, aka 21 or so on the S&P. In plain english, I think valuations have been bid up to an unsustainable level.


On Oct 25 02:16 PM TradingHelpDesk wrote:

> Earnings don’t drive stock prices nearly as much as sentiment does
> so I am paying less attention to Q3 earnings and lot more attention
> to the sentiment on this site, which is as good a proxy as any for
> shifting sentiment.
>
> But that’s not to say earnings don’t matter. When earnings give investors
> a rising sense of confidence, they can be a powerful indicator of
> a sharp drop in market 1-2 quarters later. This was certainly true
> in 2000. Peak earnings coincided with the stock market’s all-time
> high and stayed strong right through the third quarter before finally
> succumbing to the bear market in stock prices. Investors who bought
> stocks based on strong earnings (and the trend of higher earnings)
> got killed.
>
> elliottwave.com/r....

Oct 25 10:43 PM