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The Week Ahead: A September Buying Opportunity?

|Includes: DIA, IWM, IYT, QQQ, SPDR S&P 500 Trust ETF (SPY), XLF

To the surprise of the apparently cautious Wall Street analysts and hedge fund managers, stocks continued higher last week. Fund managers are holding a higher level of cash as they have a list of reasons why stocks can't go any higher.

In last week's column Are Wall Street Pros Too Negative? I pointed out that a recent survey of Wall Street strategists revealed they are recommending that their clients have just 51% in stocks. This is a level that has signaled a 22% gain in the following year.

The public also seems to be oblivious to the stock market as a Wells Fargo/Gallup poll in June and early July made it clear that the small investor is not paying attention to the stock market.

Surprisingly, "the survey shows that while the majority of investors (64%) do know that stocks increased on average in 2013, barely a quarter (24%) believe they increased by 20% or better, and only 7% are aware that the average increase was in the 30% range. The largest proportionâ€"37%â€"believe stocks increased by 10%, while another 21% think stocks were flat and 9% think they decreased."

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The new highs in 2014 have not gotten these investors any more interested in the stock market as the survey results indicate. If given an additional $10,000, only 41% would invest it in the stock market while 56% would either keep it in cash or invest in a CD. This sentiment is clearly not consistent with the stock market bubble like 2000 that some are still worried about.

The hedge funds are a bubble that appears to be still losing air as I suspected in One Bubble Starting to Burst? Just released last week was the news thatâ€"as part of Citigroup's August 5 deal with the SECâ€"they will no longer be selling hedge fund products to wealthy clients. This follows action by Calpers and Goldman Sachs to limit their exposure and business with hedge funds.

The active investors followed in the AAII surveyâ€"I am sureâ€"are well aware of what the stock market did last year and how it is doing this year. They have quickly become quite bullish as the percentage of bulls has risen from 30.89% on August 7 to 46.11% last week. This makes the market vulnerable to a pullback.

Just before the market turned sharply higher on August 8, the technical indicators suggested that we were close to a market low (Get Ready for a Rally). At the time, I was looking for a rebound that would likely fail. However, the strength of the rally has been impressive, which now makes it unlikely that the August lows will be broken.

With just a week left in August, what about the stock market in September? Looking back to 1950, it has not been a good month for stocks as it has been up 29 years but down 35. The average return has been -0.64%.

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This data, in my opinion, must be viewed in terms of the market's technical outlook. As the chart indicates, since the bull market began in 2009, September has been quite a good month. The S&P 500 was up 8.71% in September 2010 when the NYSE Advance/Decline was positive, but down 7.19% in 2011 when it was negative.

Over the past five years, the average gain has been 2.08%, and current technical readings (see What to Watch) make it likely there will be a good buying opportunity in September and I would expect a higher monthly close.

The Euro zone markets peaked in June about a month ahead of the July high in the S&P 500. The German Dax Index dropped from its June 20 high of 10,050 to a low on August 8 of 8903. This was a decline of 11.4%.

The rebound from the lows has been sharp as it is up 5.6% in the last two weeks. This is despite deteriorating economic numbers even from Euro zone stalwarts like Germany. Clearly, the sanctions against Russia are playing a role. The Dax is reaching strong resistance in the 9480-9550 area, which may trigger a pullback.

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More signs of Euro zone weakness were evident in the Markit Flash Euro zone Composite PMI Output Index, which declined to 52.8 from 53.8 in July . The chart shows that the indexâ€"as well as the Eurostat Eurozone GDPâ€"are both still in their downtrends from the highs in 2006 and 2010 (line a). It would probably take until next year before this downtrend could be broken.

The news on the US economy last week was good, especially for the housing market. The Housing Market Index rose nicely to 55 while the Housing Starts and Pending Home Sales both beat expectations.

Even more important was the sharp 0.3% rise in the leading indicators, which keeps it in a solid uptrend, consistent with an economy that is still improving. Part of this strength came from the manufacturing sector as new orders were strong.

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Also last Thursday, the Markit US Manufacturing PMI jumped to 58 from 56.3 the previous month. Earlier this year, I noted that the downtrend in the PMI (line a) had been broken and this supported my positive outlook for the economy even during the difficult 1st quarter.

Monday we get the latest data on New Home Sales along with the Chicago Fed National Activity Index and the Dallas Manufacturing Survey. There is also a full slate on Tuesday including; Durable Goods, S&P Case-Shiller HPI, and Consumer Confidence.

On Thursday, the market will be watching the latest reading on the 2nd quarter GDP as well as the Pending Home Sales Index. On Friday, as many traders leave early for the long weekend, we will get the Personal Income and Outlays report that includes the Fed's favorite inflation gauge. Also out is the Chicago PMI and the University of Michigan Consumer Sentiment.

Last week I noted that there were significant changes in the technical outlook but not all of the indicators had broken through their key resistance levels. That changed last week as the market internals were strong and the new highs in the A/D lines for the NYSE Composite, S&P 500, and Nasdaq 100 now confirm that the worst of the selling is over.

The daily OBV analysis for all of the four index tracking ETFs is still not confirming the price action but the more important weekly OBV did make new highs last week.

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As I noted a week ago, the five-day MA of the % of S&P 500 stocks above their 50-day MAs had turned higher from a low risk area. The MA dropped to 29.6% on August 6 and rose to 30.64 on the 7. The sharp rally the following day confirmed that it had bottomed. The MA is now up to 56.34% which is still below the mean at 64.6%.

I took a look recently at some stocks that George Soros had dumped as well as the favorite stocks of one of Wall Street's biggest bulls. I will be doing weekly OBV scans next week to start on a shopping list as there is now plenty of cash in the Charts In Play portfolio.

The NYSE Composite (NYA) failed to make a new high Friday as the market sagged a bit after Janet Yellen's comments. The rally has tested the downtrend, line a, from the prior highs.
There is initial support now at 10,855 and the rising 20-day EMA. The quarterly pivot is at 10,755 with additional support at 10,680.

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The daily NYSE Advance/Decline broke its downtrend last Monday, which was followed by a move to all time new highs, line c, on Thursday. The weekly A/D line (not shown) also made a new high last week.

The McClellan Oscillator overcame major resistance at line d, on Monday, which I believe is a sign of strength. The oscillator turned lower Friday, consistent with a pullback early this week.

The Oscillator only formed a short-term bullish divergence at the recent lows (see line). As I discussed in last week's trading lesson, normally you would see a more significant divergence before such a strong rally.

Once above the downtrend, there is further resistance for the NYSE in the 11,000-11,105 area.

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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.