Stocks still look more attractive than bonds on a long-term basis, except perhaps not this week, as a correction may be in store. However, certain sectors remained strong through Friday's drop. MoneyShow's Tom Aspray points out which ones still look good for cautious investors.
The US stock market got a boost this week from better than expected earnings, especially out of the technology sector. Still, most investors are not yet convinced.
The Investment Company Institute estimates that $540 million moved out of stock funds in the week ending July 11. This was better than the prior week, when the outflow was $2.87 billion.
Bonds continue to be the big winner, as they had net inflows of $6.39 billion, with the majority in taxable bonds. The prevailing concern of investors is still on the return of their capital, not the return on capital.
The chart of the iShares Barclay 20+ Year Treasury Bond ETF (TLT) shows that it made a marginal new high on July 13, and still is in a solid uptrend. TLT was strong Friday even as the stock market corrected after several days on the upside.
The daily on-balance volume (OBV) turned positive in April, when the long-term downtrend was broken. This gave a good entry point in May. The OBV is still positive, though overall volume has declined significantly from the late May highs. It would take a decisive break of support in the $124 to $125 area (line a) to indicate that a double top had been completed.
Of course, I still have trouble with the current negative real return of the ten-year Treasuries, which are poised to close at the lowest yield since World War II. Many large-cap stocks are offering attractive yields and also have potential for growth. Stocks like Pfizer (PFE), which yields 3.7% and has gained 9.6% for the year, still seem like better alternatives.
There was little in the way of news from the Eurozone last week, but clearly that and concerns over the so-called "fiscal cliff" that Fed Chairman Ben Bernanke was quizzed about last week are the focus of many investors.
Last Friday, yields on the widely watched Spanish bonds moved above the 7% level, and the euro plunged to a new low. This could put additional pressure on stocks this week.
The long-term chart of the euro shows the steady slide from the 2011 high at 1.4925 and a well-defined downward trading channel (lines c and d) . The OBV turned negative last October, breaking support (line e), and shows no signs yet of bottoming.
A bounce from the 1.2000 level would not be surprising, with the 2010 low following at 1.1850. This is good news for those of us who have put off a European vacation for a number of years.
Most of last week's economic news reflected a softening economy. While the Empire State Manufacturing Index rose more than five points, consistent with a growing economy, orders were down. This suggests weakness down the road. The Philly Fed survey also was lower, but its rate of decline was slower.
The Leading Indicators from the Conference Board declined 0.3% in June, but the long-term chart from their press release shows that both the Leading and Coincident Economic Indexes are still rising, and show no signs of a recession. A drop in the LEI below the 2011 lows would start a new downtrend.
This week, we have new home sales on Wednesday, followed by jobless claims and durable goods Thursday. Then on Friday, we get the advance reading on second-quarter GDP and the final July reading for the University of Michigan Consumer Sentiment Index.
WHAT TO WATCH
As I had hoped last week, earnings last week were enough to push stocks higher for most of the week, though stocks turned lower on Friday. Even though the rally surprised many, it was not strong enough to resolve the debate between the bulls and bears (see "Bear Flag or Bear Trap?")
While most of the major averages still closed the week higher, individual investors have turned much more negative. The AAII survey of individual investors shows that only 22% are now bullish, with 41.8% bearish. These are levels that are often seen near important market lows.
In contrast, the financial newsletter writers are still too bullish, at 43.6%, with just 24.5% bearish. The number of bulls often drops below 30% at market bottoms.
The short-term outlook weakened with Friday's close. The chart of the NYSE Composite shows the lower close Friday, but it is still above its uptrend (line c). A break of the uptrend would not be surprising this week, but it will be important that the lows from July 12 are not broken on a closing basis.
The cumulative NYSE Advance/Decline line turned lower after failing to move above its prior peak. A move above this level is needed to signal a stronger rally. The WMA of the A/D line is still rising, which is a positive sign. The uptrend in the A/D line could be in danger this week.
Resistance waits at 7,909, which is the 61.8% Fibonacci retracement, and this is the price level that needs to be overcome. The more important 78.6% resistance and the downtrend (line a) are in the 8,073 area.
The Spyder Trust (SPY) was still up 0.77% for the week, with next support in the $135.30 to $135.60 area and the still rising 20 day EMA. Additional support at $134-$134.50 with key support at $132.60 which was the low on July 12th.
The S&P 500 A/D line is now showing more signs of weakness. While the SPY made higher highs on Thursday, the A/D line made lower lows (see arrow). It is still barely above the WMA, but a drop below the July lows (see circle) would turn the A/D line back to neutral.
There is next resistance now at $137.70, and then further levels in the $138 to $138.50 area. The 78.6% Fibonacci retracement level at $138.99 is the major level to watch.
The SPDR Diamonds Trust (DIA) gapped lower Friday, closing down over 1%. The next support sits at the 20-day EMA at $127.32. Then, there is additional support at $126 and more important levels at $125 (line b).
The Dow Industrials A/D line has dropped back below its WMA, having failed to move above its previous high. There is next support at the July lows, and then at line d.
There is resistance for DIA now in the $129 to $130 area.
The PowerShares QQQ Trust (QQQ) gapped above its daily downtrend (line e) last Thursday, but then reversed to the downside on Friday. It still closed the week up over 1.6%, as the much stronger than expected earnings in the tech sector gave it a boost.
There were some interesting developments in the semiconductor stocks, as they appear to be bottoming.
Next support for QQQ waits at $64 (the 20-day EMA), with stronger levels at $62.60 to $63.40 and the uptrend (line f).
The Nasdaq-100 A/D line was weaker than prices, which is a reason for concern. While QQQ formed higher highs, the A/D line formed lower highs (see arrow) .
The A/D line had broken through its major downtrend (line g) in early July, so the reversal is a problem. The A/D line closed the week back below its WMA, and has important support at line h.
There is resistance at $65 to $65.30, with $65.80 to follow. The all-important 78.6% resistance stands at $66.72.
The rally in the iShares Russell 2000 Index Fund (IWM) failed well below the early July highs of $81.84, and it gapped to the downside on Friday. It has next support now in the $77.50 to $78 area.
The Russell 2000 A/D line (not shown) is holding up a bit better than prices, but did drop below its WMA on Friday. If the late June lows are violated, it would be a cautionary sign for the overall market.
The iShares Dow Jones Transportation Average Index Fund (IYT) reversed sharply on Friday, falling over 2%. The ETF lost 1.7% total for the week. A daily close under $90 will further weaken the outlook.
The Select Sector SPDR Consumer Staples (XLP) made new rally highs last Thursday, but with Friday's decline actually closed the week a bit lower. The daily chart shows first support now in the $34.70 area (line a), with stronger at $34.40 (line b).
The daily relative performance, or RS analysis has dropped below its WMA, but it did recently make new highs. It is still above support (line c).
The daily OBV has formed a negative divergence (line d), while the weekly OBV is still well above its WMA. This suggests a more cautious approach for this sector.
The Select Sector SPDR Health Care (XLV) also made a new highs last week, and did manage to close a bit higher for the week despite a 1.2% drop on Friday.
The long-term uptrend on the weekly chart (line e) is now at $36.25. The RS line is rising and well above its WMA, and the OBV also made new highs last week, confirming the price action.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.