by John Nyaradi
Friday was a slow, slow day as far as volume was concerned but I think that we’re going to see a lot more volatility and a lot more volume in the week ahead.
The coming week precedes the election on November 2nd and the Fed announcement on “QE2” on Wednesday and so quite likely we’ll see some “sell the news” activity leading up to those two historic events as well as a response to the statements coming from the G20 meeting this weekend in South Korea regarding stabilization of the foreign currency exchange markets.
Overall, I expect that the fireworks are about to start.
Looking At My Screens
We have been in a consolidation pattern on major indexes for the past several days and last week’s action was choppy, to say the least. Tuesday saw the big correction, followed by a ‘buy the dip’ rally on Wednesday, a failed follow through rally on Thursday and a flat Friday with the major indexes ending up slightly higher for the week.
Internals remain weak as volume, breadth and overall participation remain low and, as always, these are indications of a weak market.
But the big news last week that went mostly unreported was in the U.S. dollar that snapped a 5 week losing streak and likely found support at the G20 meeting wrapping up this weekend.
chart courtesy of StockCharts.com
In the USD chart you can see how the dollar has come off a strong bottom and its MACD has turned positive along with the RSI coming off oversold levels. The thin black line is the S&P 500 and it’s easy to see how the S&P and dollar have moved inversely to each other for the last several months.
If the dollar is making a change of direction here and a move up, it’s quite likely that stocks, gold and commodities would maintain their inverse correlation and so could make a move down.
Furthermore, investor sentiment is running 2 to 1 in favor of the bulls which represents excessive optimism and is a bearish indication while the market remains overstretched and overbought by almost any measurement.
The View from 35,000 Feet
The news this week was mixed, with corporate earnings beating expectations and economic news less positive.
So far 85% of reporting S&P companies have beaten estimates with positive earnings but several offered cloudy outlooks and much of the earnings growth is still related to cost cutting rather than top line growth.
In the all important real estate market, clearcapital.com, an outfit that monitors the housing industry, reported a “sudden and dramatic drop in U.S. home prices” with a 5.9% decline over the last two months, a level not seen since March, 2009,” and they’re expecting other industry metrics to show similar declines in upcoming reports.
Finally, in South Korea, the U.S. took some heat from the Germans for going the “wrong way” by flooding the market with liquidity and China basically rebuffed all calls for letting its currency appreciate.
Bloomberg reported that the G20 “will move towards more market determined exchange rate systems…and refrain from competitive devaluation of currencies,” and U.S. Treasury Secretary Tim Geithner said he supports a “strong dollar.” (A glance to the USD chart above would indicate that either he failed in this policy or he has been woefully ignored.)
In any case, the G20 meeting adds an element of drama to the upcoming Federal Reserve meeting on November 2-3 and their plans for more quantitative easing which is particularly harmful to the dollar and won’t go down well around the world based on what Dr. Bernanke heard this weekend in South Korea.
What It All Means
High complacency coupled with extreme optimism and overbought conditions lead to a dangerous technical situation. Combined with increasing pressure on the U.S. to stop debasing the currency and the “sell the news” mentality of Wall Street, we could certainly be in for some volatile times in the week ahead.
Wall Street Sector Selector remains in the “red flag” mode, expecting lower prices ahead.
The Week Ahead
Economic reports this week will focus on the housing industry, initial GDP reports and consumer sentiment. Also the last full week of campaigning for the midterm election will be key as the market has apparently priced in “gridlock” and a deviation from this outcome could be a potential market mover.
1000: September Existing Home Sales
0900: August Case/Shiller Home Price Index
1000: October Consumer Confidence
1000: August FHFA Home Price Index
0830: September Durable Goods
1000: September New Home Sales
0830: Initial Unemployment Claims, Continuing Unemployment Claims
0830: Q3 GDP Estimate
0945: October PMI
0955: October Michigan Consumer Sentiment
Monday: Texas Instruments (TXN)
Tuesday: Dupont (DD)
Winners: Financial, Aerospace, Real Estate
Losers: Brazil, Silver, Gold
So it should be an exciting couple of weeks, filled with fireworks and news. Never a dull moment these days.
Disclosure: No specific positions mentioned. Author holds inverse ETFs and positions could change at any time.