Market at Another Turning Point

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Includes: DIA, EEM, IYR, MOO, QQQ, SLV, SPY, XOP
by: Wall Street Sector Selector

On Friday, we closed our 5 positions in the Standard Portfolio for the following gains:

EEM: +2.2%

XOP: +2.1%

SLV: +4.2%

IYR: +8.4%

MOO: +2.1%

The earliest of these were opened on 7/27, so in three weeks we banked +3.8% realized gains over the 5 position portfolio.

Looking ahead, we are at a critical turning point in the progress of the market this year.

Reprinted courtesy of StockCharts.com

The chart above is of the Wilshire 5000, the broadest look at the U.S. stock market. The moving average is the 70 week moving average which is widely regarded as the barometer of bull or bear markets. You can see how it picked up on the tech wreck in 2001, the subsequent rally from 2003-2007 and the current bear market.

Today the current rally has brought us to just below the moving average and we currently stand 1.4% below this decisive point. A break above the moving average could confirm that indeed a new bull market could be underway and we could expect perhaps years of higher prices ahead.

A failure here could indicate declining prices and continuation of the current bear.

The next weeks and months will prove pivotal to our future.

We have switched to a "Yellow Flag Flying" mode in that we expect choppy prices ahead. Right now we're in a trading range bunched around the 1,000 level on the S&P and looking for a break above 1018 or below 990 for short term direction.

Also, MACDs on the major indexes went negative on Friday, indicating declining momentum and the possibility of lower prices ahead in the short term.

The View from 35,000 Feet

Last week's news was a little ominous for the continuation of the current rally.

The biggies were the unexpected decline in retail sales for July which came in worse than expected and the also unexpected decline in consumer confidence which came in at the lowest since March and was the second monthly decline in a row.

And no wonder, since jobless claims unexpectedly rose on Thursday and roughly one third of American homeowners are "underwater" in their houses, meaning they owe more on their home than it's worth.

The Fed statement after their meeting pointed to a subdued recovery and continuing problems with job losses, declining housing prices and household debt.

The S&P currently trades at 18.7X earnings, the highest since 2004, and many analysts now are saying that the market has gotten ahead of itself.

Other flashing red lights are the facts that September is historically the worst month for the stock market, increased insider selling has been reported, and corporate earnings, while better than expected, were due mostly to cost cutting rather than top line earnings improvements.

The consumer has always been the key to economic recovery, and this time we're possibly looking at a systemic change that could make this recovery very different from previous ones we've seen; huge declines in house prices, income, household net worth and excessive debt that needs to be worked off consumer balance sheets all point to something other than the traditional V shaped recovery.

To top it all off, the largest bank failure of the year, Alabama's Colonial Bank, happened on Friday along with a couple of others in Arizona and Pennsylvania, bringing the total to 78 bank failures for the year and the FDIC having to protect more than $300 Billion in assets going into this lazy mid August weekend.

The Week Ahead

Monday: August Empire Manufacturing Report

Tuesday: July Building Permits, July Housing Starts

Thursday: Initial Jobless Claims, July Leading Economic Indicators

Friday: July Existing Home Sales

Sector Spotlight

Leaders: Bonds, Japanese Yen, Short Emerging Markets

Laggards: Real Estate, Oil, Homebuilders

We've talked a lot about the consumer being the key to the future of the recovery and the stock market. I'm sure you've noticed changes in your own spending patterns over the past few months, as I have in my family's.

Nevertheless, there will always be opportunities and we will continue to seek those out. The next few days, weeks or months will set the future direction of this market and we will work to attempt to correctly position ourselves as bulls or bears according to how this situation develops.

Disclosure: EEM, XOP, SLV, IYR, MOO