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Price Headley was inducted into the Traders' Hall of Fame in 2007 and is the founder of BigTrends.com, which provides investors with specific real-time stock and options strategies and investment education to profit from significant market trends. Price appears regularly on CNBC, Fox News, and... More
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  • Fed Driven Rally Continues the Overextended Market - Weekly Market Outlook
    Apparently the secret formula for bullishness is quantitative easing. Never mind the fact that the Fed's decision to (further) lower interest rates doesn't directly create jobs, nor does it prompt a bank to suddenly determine a potential borrower is more credit-worthy.  The market just wanted to see evidence that the Fed was ahead of the curve, and Bernanke delivered. Boom - stocks gained 3.6% last week, most of it on Thursday.

    But is there any longevity to the uptrend? Bluntly, you'd be hard-pressed to even call it a trend. It was more of a one-hit-wonder that just happened to drive the market further into an overbought situation. But hey, the market's rallied right through worse.

    We'll look at the indices and odds below, right after a run-down of last week's and this week's economic data.

    Economic Calendar

    There's too much data from last week to look at all of it; we'll just hit the highlights, starting with personal income and personal spending. The former was down 0.1% for September, while the latter was up 0.2%. Correspondingly, consumer credit levels were up by $2.1 billion.... the first increase in many, many months. Back to the norm of "spend more than you make."

    On the jobs front, the bigger trend showed marked improvement, even if the near-term trend slumped a bit over the last couple of weeks.

    The ADP Employment Change of net +43K jobs coincided with the 151K increase in nonfarm payrolls for October...both well above expectations, and both the strongest showing in quite some time. Unemployment held steady at 9.6%.

    More recently, the previous week's initial unemployment claims popped to 457K (which is in the middle of the recent range of readings), while ongoing claims from two weeks ago drifted a hair lower to 4.34 million. Despite the modest panic, the new claims level isn't all that remarkable.

    The rest is cited on the table below.

    Economic Calendar
    110710-econ-calendar

    As for the coming week, it should be much less hectic. Only a handful of numbers are in the cue, and none of them are earth-shattering. We won't even bother with a preview; just look at the lower half of the above calendar.

    S&P 500

    What is there to say about the S&P 500 (NYSEARCA:SPY) (SPX) that would mean much in the way of an outlook? Last week was all about the Federal Reserve inducing a rally. Fundamentals didn't matter. Earnings didn't matter. Technical momentum - or lack thereof - didn't matter. The market pretty much demanded Bernanke do something, and he obliged. The question from here is, how much mileage can stocks get out of what should largely be a pointless action (QE) from the Fed?

    Unfortunately, the answer is "not much" if previous emotionally-driven rallies are any clue. At some point the market has to justify its value.

    In any case, the gravy train may have already stopped, with the S&P 500 back at the upper Bollinger band (purple) that's been such a problem going as far back as early 2009.

    On the other hand, we need to at least acknowledge that the upper band line isn't necessarily a bearish reversal point - it may only be the area where the incredible rally slows down.... like we saw in October.

    Simultaneously, the VIX (NYSEARCA:VXX) (NYSEARCA:VXZ) stopped its downward move at its lower Bollinger band, suggesting confidence in the rally at this point is low.

    So a pullback is in the cards? We're due a pullback, but we were due a pullback in late October and the S&P 500 continued to rally anyway. [As John Maynard Keynes said, "The market can stay irrational longer than you can stay solvent."] So, as for how to proceed from here...

    The market is overextended now no matter what; look for a pullback to some degree early this week. How far? That depends.

    Until the 20-day moving average line (blue) at 1185 - and rising - breaks down as support, there's no valid reason to assume the implosion is nigh. Of course, after the 16% runup since September's low, any implosion could be a hefty one when and if it gets rolling.

    On the flipside, don't rule out more upside. If a small retreat can cool the rally off enough to bleed off some of this overbought pressure (a dip to the 20-day line would do the trick), the bulls could regroup and restart the uptrend pretty nicely.

    The last thing the bulls want to see happen here, however, is for the market to pop even just moderately above the upper Bollinger band. Such a move could be interpreted as a blowoff top.... a last hurrah, of sorts. Be leery of such a move,

    In the meantime, the market's in limbo. You may want to stay on the sidelines until we get a little more clarity.

    S&P 500
    110710-sp500

    Sector Performance

    After a multi-week slump, financial stocks finally took off and led last week's gains. Given how badly they'd underperformed since mid-September, any marketwide bullish tide should continue to prove very fruitful for the group.

    On the losing end of the spectrum were health care stocks, though they still ended the week with a small gain.

    Sector Rank
    110710-sector-rank

    Here's a look at how each sector has been accelerating or decelerating since the late-April top. The remaining upside for the financial sector is clear here. And, it's also clear with this graphic that telecom remains stretched thin.

    Sector Comparison
    110710-sector-comparison

    Industry Performance

    No major surprises here, considering the leading and lagging sectors. Banks blazed the trail for financials (NYSEARCA:XLF), and biotech pulled health care stocks lower.

    That said, some of the best and worst from last week are newcomers... and made big reversals that may be the beginning of trade-worthy trends. Take the 13% pop from the construction materials group for instance, which is still one of the biggest losers from any prior timeframe. Conversely, broadcasting stocks finally got knocked off their bullish perch, yet still have plenty of room to slide lower.

    Industry Rank
    110710-industry-rank

    Earnings Calendar


    You'll see a noticeable change in the length of the earnings calendars from this point on, indicating we're now past the heart of earnings season. There are still some game-changers in the lineup though.

    As for how the market fared so far (with 80% of companies reporting), about 67% of companies topped their EPS estimates, and 61% beat their revenue estimates. That's pretty much the norm. 

    The most surprises came from the consumer discretionary and technology sectors. A full 82% of consumer discretionary stocks beat estimates, while more than 91% of technology companies topped last year's earnings.

    Technology stocks (QQQQ) also saw the biggest revenue increases; 96% of these companies beat last year's comparable revenue levels. The financials generated the most beats of revenue estimates, with 87% of its stocks doing more sales than expected.

    Here's what's in store for this week.

    Earnings Calendar
    110710-earnings-calendar

    Trade Well,
    Price Headley
     


    Disclosure: No positions.
    Nov 08 9:28 AM | Link | Comment!
  • Keep an Eye on the Euro
    One of the key indicators I'm watching in this market is the Euro (in addition to bonds TLT, discussed here).  I prefer to use the CurrencyShares Euro Trust (NYSEARCA:FXE) because it it is very liquid in both the underlying and its options.

    The key here is that many hedge funds and institutions have "short Euro" plays on.  When/if these begin to unwind or get reversed to the upside, we will see Euro buying and selling in assets such as Gold.

    Recently the FXE has shown signs of life, see the chart below.

    FXE Daily Chart

    blog070210euroa

    You can see the downtrend in place on the Daily chart since December 2009.  However, we see some indications that the bounce in the Euro may have some legs.  Percent R has crossed into clear bullish territory above 80 for the first time in this downtrend.  Also, we are now 2 trading days above the 40 day exponential moving average (purple line).  Previous rally attempts failed at this trendline and reversed lower, with a 1 day blip above in April.  Closing above that ma today should be considered a confirmation, and the 40 day and 20 day exp moving averages should now act as support on pullbacks.  They lie around 124 and 123 currently.

    Disclosure: No positions.
    Tags: FXE, UUP, TLT, GLD, Euro, Currency, Bonds, Gold
    Jul 02 12:50 PM | Link | Comment!
  • Nasdaq Depth and Bollinger Bands is a Concern for the Rally
     Weekly Market Outlook (Technical Analysis, Economic Calendar, Sector Performance):

    We talked about this a week ago, and the idea gained some traction over the past five trading days. What’s that? Resistance at the upper 50-day Bollinger band (2 SDs). Though the NASDAQ gained 0.87% last week, it’s clear the rally is really struggling now.

    In the meantime, the resistance line that stopped the December rally – and sent the composite from 2300 to 2125 by early February – is lined up with that upper Bollinger band to work on sending the market lower again. All of that shows up on the chart below.

    While anything can and will happen, this is the point where the market’s odd start to work against it. Yes, there’s the possibility the NASDAQ could overcome the odds and hurdle both ceilings. And "the trend is your friend" -- we've definitely made more bullish trades than bearish recently in our Option Trading. But…


    Nasdaq Composite Daily Chart
    Nasdaq Composite Daily Chart with Bollinger Bands

    Market Depth:

    Though the market is up for the last two weeks, the engine’s running on fumes. Why do we say that? Though stock values are higher, the amount of buying has fallen off. Simultaneously, the degree of selling volume has grown over the last two weeks. The analysis is simply referred to as ‘depth’.

    On the chart of the NASDAQ Composite below, we’ve plotted the NASDAQ’s ‘up’ volume and the NASDAQ’s ‘down’ volume on a daily basis. Those are the pale, thin lines on the chart…. light green is bullish, and pale red (pink) is bearish.

    Since the daily data is too erratic to use, we’ve also plotted moving average lines on top of those tow pieces of data. They are the bolder, thick lines, intended to show more of the actual trend.

    Now, here’s the clue…two weeks ago, daily bullish volume for the NASDAQ exchange was averaging 1.4 billion shares, while the average bearish volume per day was scoring around 750 million. As of Friday, bullish volume came in at an average of 1.14 billion, and the daily bearish volume average was 1.12 billion shares. Yes, that’s still enough to be net bullish, but that underlying trend is one that should alarm the bulls – it’s on the verge of tipping bearishly (as is the market).

    We’ll continue to monitor this data and its day to day changes, though we’ll also add these undertow clues are right more often than not…. and they’re early, as we saw in January.

    Nasdaq Composite Up and Down Volume Chart

    Nasdaq Composite Daily Depth Chart

    Economic Calendar:

    Although a light week in terms of the quantity of economic news to work through, the weight carried by the data we did get was more than modest.

    The biggest news was on the real estate front. Existing home sales held steady in February, around 5 million, while new home sales hit another multi-year low – again – at 308,000. Both were basically in line with estimates.

    Although the disappointing new home sales number is far from encouraging, considering that more than 90% of the housing market’s sales come from existing home sales, the flattened existing home sales figure suggests we’re seeing the market basically hold up. Not so. Don’t forget, the existing home sales level has been falling too, peaking at 6.8 million in November. Factoring in that home priced edged lower again as well; it’s hard to say the real estate market is improving by any stretch of the imagination.

    That’s not to say the stock market can’t fully recover without an accompanying rebound in the real estate market, but it sure doesn’t help.

    New and ongoing unemployment claims also fell a tad, and were a split decision compared to forecasts. We’d consider both to be uneventful last week.

    And finally, Q4-2009’s GDP figure was finalized…. and adjusted downward from 5.9% (annualized) to 5.6%. From this point forward, GDP growth should be less impressive, as the year-over-year comparables are a much higher bar to hurdle. Plus, the second year of any recovery period is rarely as brisk as the first year. So, don’t be disappointed by what’s apt to appear as a slowing economy.


    Weekly Calendar of Economic Reports

    Sector Performance:

    The consumer discretionary stocks came out on top last week – a trend that’s actually been developing for quite some time. While we’re still mixed messages on the status of consumers, the market is largely betting that all these companies are making a revival. Not so. Pick and choose wisely within the group, as consumers are still fickle – though decisive – about the ‘wants’ they splurge on.

    Financials and technology are also still on their romp… surprise, surprise. Energy and utilities are still dragging the bottom; neither are total shocks.

    That said, bear in mind it doesn’t always pay to chase the hottest group, nor does it pay to avoid the weakest group. Things change. This ranking is only one aspect of what should be a multi-faceted tend-spotting process.

    Weekly Sector Performance Ranking

    Industry Performance:

    It’s been a while since we added an individual industry ranking, so here’s an updated list.

    Though it’s not always this clean, this time around it’s very easy to see which industry trends below are driving the sector trends above. Consumer electronics and vacation travel are boosting the consumer discretionary sector, while coal and energy services are dragging down the energy sector. The strength in drugs and the weakness managed care are likely to be post-healthcare-reform volatility.

    As before, be smart about how you interpret the data, but the numbers don’t lie.

    Industry Performance Ranking Table



    Disclosure: No positions.
    Mar 30 11:43 AM | Link | Comment!
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