Last week's ECB action has convinced many that the Fed will also ease this week but while the stock market has resumed its uptrend there is one key sector according to MoneyShow's Tom Aspray whose failure to rally should not be ignored.
The impressive gains in the stock market Thursday combined with the weaker than expected jobs report on Friday has convinced many that future easing by the Fed is indeed a certainty. Of course, historically this is a very positive sign for stock prices and, for many months, I have been looking for prices to move higher into the end of the year.
Given the historical patterns, it is likely to be a bumpy ride going into the end of the year. During election years, volatility has been high in September, as I discussed Friday, and the ECB plan still faces some hurdles with the ruling from the German constitutional court due on Wednesday. Though German Chancellor Angel Merkel has supported the plan, many in Germany, including the Bundesbank President Jens Weidman, does not.
The FOMC Meeting also begins on Wednesday so this week's markets will be especially vulnerable to some wide swings. Last week's strong action has improved the technical outlook, which had deteriorated in August, but it is still not looking as strong now as it did during the fall of 2010 or 2011.
Of particular concern is the weak action in the Dow Jones Transportation Average, which up through last Thursday's close, was only up 0.5% for the year compared with an 8.8% gain in the Dow Jones Industrial Average.
The chart of the Industrials shows a pattern of higher highs going back to 2011 (line a) as it is very close now to the highs that were made in early May. The weekly chart also shows a clear pattern of higher lows, which puts it in a clear uptrend
The Dow Jones Transportation Average started to diverge in early 2012 and shows a pattern of lower highs, line b. The failure of the Transports to confirm the Industrials may warn of future economic weakness which could mean that the rally in the Industrials is not sustainable.
Long-term readers will know that I follow the Transports closely and they have been leading the overall market higher from the March 2009 lows until the July 2011 highs (line 1).
The Dow Transports were much weaker during last summer's decline and have never recovered. The key support level to watch is at 4850 as a weekly close below this level would confirm a new downtrend in the Transports.
The global stock markets are being led higher by the German Dax, which is up 22.3% so far this year. The monthly chart shows that the downtrend from the 2011 highs has now been broken. The resistance from the 2007 highs, line a, is now at 7440 with the 2011 high at 7600.
The last two days of the week are likely to carry the most weight in terms of the economy. On Thursday, we have the jobless claims and Producer Price Index, followed by the FOMC announcement.
The Consumer Price Index is out Friday along with Industrial Production, and the August data on Retail Sales which were up in July for the first time in four months. Also being released is the mid-month reading on Consumer Sentiment from the University of Michigan which may be impacted by last Friday's jobs report.
Consumer spending is an important force for the economy in the last part of the year and the retail sector is typically seasonally strong from September through Christmas.
What to Watch
The stock market bears were hit hard last Thursday as the September E-mini S&P 500 futures were up almost ten points an hour before the market opened. I was expecting the technical deterioration that started to surface in August to lead to a correction of 5% or more. Instead, the futures corrected just over 2% from high to low before exploding on the upside.
There has clearly been some improvement in the technical picture as I discuss below. However, the sentiment picture has gotten more negative as 51% of the newsletter writers are now bullish. The danger zone is typically in the 55-60% area. The individual investor is much less bullish at 33% according to AAII.
The asset class analysis shows that the Spyder Trust (SPY) is now up almost 15% on the year, which is a dramatic improvement from the June lows. Gold had a good week and is now up close to 11% for the year as it remained unchanged for much of June and July.
I have highlighted two areas on the chart that look quite interesting from an asset allocation perspective. The first occurred in July when the performance of the SPY moved well above the performance of TLT which represents the bond market. This coincided closely with the peak gain of 9% for TLT. Since then the SPY has gained about 6%.
The other point occurred in mid-August when the performance of the TLT dropped below that of GLD. Since then GLD has gained almost 9%. Some analysts are looking for a confirmed top in the bond market before they will turn more bullish on stocks. Rates did turn higher this week but it will take another week or so before a top can be confirmed.
The daily chart of the NYSE Composite shows that May 1st highs were exceeded on Friday with next resistance at 8327. Once this level is overcome, the next major resistance is in the 8670 area. There is good support now in the 8000-8050 area.
The NYSE Advance/Decline line made significant new rally highs last week as the advancing stocks led the decliners by a 4 to 1 margin. This may be signaling the start of a period similar to what we witnessed in early 2012 when the A/D line was in a steep uptrend (in blue).
The Spyder Trust (SPY) has reached my text upside target as the ability to hold the 140 level again early in the week suggested the bulls might be in charge.
The upper boundary of the trading channel is now in the $145.50 area. Resistance from the 2011 and early 2012 highs is also in this area.
The S&P 500 A/D line has moved back to its long-term downtrend, line h, and is back above its WMA. A strong move above this negative divergence resistance and the August highs would turn it positive.
There is minor support now at $142.50-$143 and then at $141.27 and the rising 20-day EMA.
The SPDR Diamond Trust (DIA) challenged the August high of $133.02 last Friday but was unable to close above it. The May high was at $133.14. The weekly chart may be forming a rising wedge formation, lines and b, with the upper boundaries, line a, in the $135 area.
The weekly relative performance or RS Analysishas plunged over the past few weeks as the DIA has been much weaker than the S&P 500. This explains the drop in many of the high-yield big cap stocks as the market seems to be less afraid of risk.
The weekly on-balance-volumelooks strong as it turned up last week and is holding well above its rising WMA and uptrend, line d.
The PowerShares QQQ Trust (QQQ) easily exceeded the highs from early in the year as it hit $69.55. The upper trend line on the weekly chart, line e, and the weekly Starc+ Band are now in the $72 area.
Unlike the DIA, the relative performance analysis on the QQQ continues to look strong as it is well above its rising WMA. In my review of the te ch sector last weekI did note that the broader measures of the technology sector were also leading the market higher.
The OBV did make new highs in August and has turned up once more and shows a bullish pattern. There is minor support for QQQ now at $68.50 and then at last week's low of $67.42.
The iShares Russell 2000 Index (IWM) accelerated to the upside last week and broke through the trend line resistance in the $83 area. Last Friday's close was just below the March high of $84.66 with further resistance from 2011 at $86-$86.81.
The Russell 2000 A/D line (not shown) has finally broken through its downtrend from the February highs indicating that new money is flowing into the more speculative small cap stocks. A successful retest of the breakout will support the bullish case.
There is good support for IWM now in the 78.50-$80 area.
Last week, all of the sectors except the Select Sector SPDR Industrials (XLI) and the Select Sector SPDR Utilities (XLU) moved well above the August highs.
The best performers for the week were the Select Sector SPDR Financial (XLF) up 3.5% and the Select Sector SPDR Materials (XLB) up 3.6%. This could mark an important turn for both of these sectors and I will go into them in more detail this week.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.