The short-term technical picture does not look strong for stocks, although certain plays could enter a buy zone on the next correction. Above all, MoneyShow's Tom Aspray suggests investors remain patient through the upcoming storm of volatile economic news.
Stock investors found enough positives in the long-awaited comments from Fed Chairman Ben Bernanke last Friday to push stocks higher, as the major averages recouped most of the week's losses.
For the month, the major averages were higher with the Spyder Trust (SPY) up 2.6%, the SPDR Diamond Trust (DIA) up 1.1%, the PowerShares QQQ Trust (QQQ) up 5.5%, and the iShares Russell 2000 Index (IWM) gaining 5.3%.
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Gold responded very positively to the comments by Bernanke, and as I noted last week, the technical outlook does suggest that gold has completed its seasonal bottom.
A look at the this year's performance for some of the major asset classes shows that the stock market, as represented by the Spyder Trust (SPY), is up well over 12%. For the year, GLD is now up well over 7%, after dropping into negative territory in May.
Even bonds have rebounded after a sharp slide from late July until the middle of August. TLT was up 9% on July 25, but by August 16 was just barely in positive territory. On the other hand, after an ugly second quarter, crude oil prices are almost back to unchanged for the year. This is a dramatic improvement from the late June lows, when crude was down 19%.
Most are aware that September is the weakest month for stock prices, but in election years the winners and losers are about even. Given the recent low level of volatility, I would expect September to be a more volatile month.
This is made more likely by the series of important dates in September that are likely to bring the Eurozone crisis back to the forefront of the news. We also have the next Fed meeting on September 13, and any action will be heavily influenced by this week's monthly jobs report.
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Stock investors should keep a close eye on interest rates in September for insight on where stocks are likely to be headed. Interest rates rose significantly from the latter part of July, as the yield on the ten-year T-Note rose from 1.39% to a high of 1.86%. The long-term downtrend (line a) was just reached.
Rates have since turned lower, and the weekly yield chart shows no strong evidence yet that yields have bottomed. As for longer term rates, the chart of the iShares Barclays 20+ Yr Treasury Bond ETF (TLT) does look more interesting.
The weekly chart shows that TLT dropped from a high of $132.21 to a low of $120.52, which was a fairly normal retest of the breakout level (line b). The
on-balance volume (OBV) reflects a less bullish outlook, as it failed to confirm the new highs (line d), then dropped below its WMA.The long-term uptrend in the OBV (line e) has been tested, and a strong move above its WMA would be consistent with a move to the upside and lower long-term yields. This is likely to correspond with further weakness in the stock market. On the other hand, if the OBV drops below the recent lows, it would paint a more positive outlook for stocks.
The economic news last week was a bit more encouraging, especially for the housing market, as well as consumer sentiment. Friday's report from the University of Michigan rose to a three-month high. The Chicago PMI report on Friday also showed an increase in new orders, even though the index was down slightly from the prior month.
There is plenty of new economic data in this holiday-shortened week, with the PMI Manufacturing Index and the ISM Manufacturing Index both out on Tuesday, along with construction spending.
On Wednesday, we get the latest reading on productivity and costs, which can be used to determine future inflationary trends. In addition to the jobless claims on Thursday, we also get the ADP Employment Report and the ISM Non-Manufacturing Index. Of course, Friday brings the monthly unemployment report, which historically causes a sharp increase in stock market volatility.
What to Watch
In spite of Friday's gains, there was little change in the daily Advance/Decline analysis that I discussed on Friday. Historically, when the market internals are weaker than prices, it eventually leads to a market correction.
The weekly analysis does look better, which suggests that a correction (when it occurs) will be well supported. If the market continues to tread water until Friday's job report, it could provide the catalyst to push stocks lower.
For the September S&P 500 E-mini futures, a daily close below the support at 1,394 to 1,396 would be the first sign of a deeper correction. There is further support at 1,375 to 1,387.50, with the 38.2% retracement support from the recent highs now at 1,360.
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The longer-term daily chart of the NYSE Composite shows that we closed the week on the flat 20-day EMA. The 38.2% support is just below 7,800 which is about 2.6% below Friday's close. The longer-term uptrend (line b) is at 7,540.
The NYSE Advance/Decline line did make new highs in August, as it surpassed the March highs (line c). With Friday's close, the A/D line is back above its WMA and is trying to hold the short-term uptrend (line d). The A/D line has longer-term support at line e.
In addition to weakness of the daily market internals, the sentiment is also too bullish in my opinion to suggest that stock prices will accelerate to the upside from current levels. As of August 30, 34.7% of individual investors according to AAII are bullish, down from just under 42% last week. But 48.9% of the financial newsletter writers are bullish, which is uncomfortably high.
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S&P 500
The weekly chart of the Spyder Trust (SPY) shows that the upper trend line resistance is at $144.50, which may be a tough level to overcome. There is initial weekly support at $139.50 to $140, with the rising 20-week EMA at $137.20.
The weekly OBV has turned lower after breaking out above major resistance (line b). The OBV is above its WMA and support (line c).
As Friday's chart indicated, the S&P 500 A/D has continued to form a series of negative divergences, which indicates that fewer and fewer stocks are pushing prices higher. A daily close under $139.80 would be the first sign of a deeper correction, with the 38.2% support at $137.
Nasdaq-100
The weekly chart of the Powershares QQQ Trust (QQQ) shows the move to new highs for the year in the past two weeks, with the Starc+ band this week at $71.
There is initial weekly support now at $66.50, with the 38.2% Fibonacci retracement support at $65.46. The weekly uptrend, line d, is at $63.50.
The weekly relative performance, or RS Analysis is positive and has confirmed the new price highs. The weekly OBV also confirmed the new highs, and its WMA is still rising.
The Nasdaq 100 A/D line is acting even weaker than the S&P 500, and is closer now to its uptrend from the June lows.
Dow Industrials
The SPDR Diamond Trust (DIA) bounced Friday after closing slightly below the $130 level last Thursday. It is clearly acting the weakest of the four averages, as it is in a short-term downtrend.
A close back above $131.56 is needed to break the downtrend, with more important resistance in the $132 to $133 area. The 20-day EMA (not shown) has now turned lower, and DIA closed right on it last Friday.
A daily close below $129.60 would be a sign of further weakness. The Dow Industrials A/D line (not shown) continues to act weak, and is well below the highs made in early August.
Russell 2000
The iShares Russell 2000 Index (IWM) closed higher Friday, but below the early highs. Key resistance stands at $82, and then in the $83 area.
The daily chart shows an apparent continuation pattern and a close below $78.70 will reassert the downtrend. There is more important support in the $76 to $77 area.
The Russell 2000 A/D line (not shown) formed a negative divergence early in the year, and the A/D line has tested this resistance several times this summer, but has failed to move through it. This is characteristic of a weak market.
NEXT: Sector Focus, Commodities, and Tom's Outlook
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.