With only data on the services industry last week the markets fixated on Apple's product announcement and for most of the week did not pay as much attention to the upcoming Fed meeting as I expected. On Thursday the ECB decided to make no policy changes which may put them off until December.
This was a bit surprising since inflation in the Euro zone (see chart below) is still low and well below the target zone of 2%. Many US economists and many of the know nothing representative in DC continue to criticize not the original efforts to fight the recession but fight all easing efforts. They apparently do not understand that there is no clear way to defeat deflation. If they look at what has happened in Japan they should be worried.
The market's opened Friday with strong fears of higher rates which pushed the major market indices down 1% by mid-day? There are many that have been waiting for a reason to sell and this may turn the investor sentiment even more negative on stocks.
According to AAII there was little change again last week in the sentiment of individual investors. The bullish % was up 1.1% to 29.7% while the bearish % dropped 3% to 28.5%. The VIX has stayed low until Friday when it rose sharply and two consecutive closes above 15 is needed to suggest that a bottom is in place.
One market that has been skyrocketing this week as been crude oil as comments a week ago that Russia and Saudi Arabia might agree on limiting supply started the ball rolling. The October crude oil contract closed at $43.16 on September 1st as it tested the daily starc- band, point 2. The Herrick Payoff Index, which uses volume and open interest had turned negative on August 26th when crude was over $4 higher.
As of the close on Thursday, September 8th crude is at $47.38 and is up 6.6% for the week. Though the OBV is weakly positive the HPI is still below the zero line and its declining WMA. This suggests that crude oil is likely to move lower in the next week or so before a bottom is complete.
In this week's column I wanted to focus on the overseas markets. I have been following global stock markets for many years and for many years I wrote daily commentary on both the Honk Kong and Japanese markets for some leading European banks.
Over the years I have also recommended some of the international and country ETFs. I have just added regular analysis of these ETFs to the Viper ETF Report where I publish the table above each week. For each ETF I provide not only the quarterly pivot which I use for my longer-term trend approach. The table also includes the starc band values and the results of my monthly and weekly scans. There are a number of ETFs where the monthly or weekly analysis is still negative (in red). New monthly buy signals often lead to some nice trending moves in these ETFs.
The German Dax Index has been correcting from the April 2015 high of 12,390 as it came close to the 50% retracement support at 8675 in February. The MACD-His had given a nice buy signal in September 2012 at 7216 (line 1) as there was a bullish crossover, point 2.
The MACD turned negative in August 2015 and the MACD support, line a, was broken the following month, point 4. The technical studies have stayed negative ever since though the Dax has recently bounced above its 20 month EMA. A new buy signal is possible before the end of the year.
The monthly on-balance-volume (OBV) on the iShares MSCI Germany Index (NYSEARCA:EWG) completed its bottom formation in July 2012 (line 5) as it moved above its WMA and the resistance at line b. The OBV stayed positive until July 2014 (line 6) as EWG rose from $18.68 to a high of $30.45. The OBV has been negative since the top as it has stayed below its WMA and the resistance at line c.
In addition to volume and momentum analysis I also look at the relative performance to see which ETFs are performing the best. This chart illustrates the relative performance in 2016 of the iShares MSCI Brazil Capped (NYSEARCA:EWZ), VanEck Vectors Russia ETF (NYSEARCA:RSX), iShares MSCI Indonesia (NYSEARCA:EIDO) and the Spyder Trust (NYSEARCA:SPY).
There is a wide range so far in 2016 with the EWZ up over 76% compared to 8.7% in the SPY. Both Russia-RSX and Indonesia-EIDO have done 3-4 times better than the SPY as they are up 34.3% and 25.8% respectively. The % Change chart reveals that these three country ETFs assumed leadership in March and there are no signs yet that this has changed.
These ETFs do trade well based on the technical studies like the OBV and quarterly pivot analysis. The OBV on the iShares MSCI Brazil Capped turned positive on February 26th, line 1, as it moved well above its WMA. A weekly doji buy signal had been triggered in late January ( A trading lesson on these signals was sent out to Viper clients in early September).
The next week (March 4th) EWZ had a weekly close above the quarterly pivot at $22.35 which further confirmed the earlier positive signals. It should be noted that the country funds can be more volatile. For example, EWZ corrected 16% from late April until early June but held well above the 2nd quarterly pivot at $23.71. The 3rd quarter pivot is at $28.47 and is well below the current price.
The drop last week in the ISM Non-Manufacturing Index reinforces the downtrend, line a, that was developed with June's decline. At 51.4 it is still well above the key 50 level but the four point drop in August is a concern as it is the lowest reading since 2010. One of the few positives in the report was the growth in new orders.
This week we have Import and Export Prices on Wednesday followed on Thursday by the PPI, Retail Sales, the Philadelphia Fed Business Survey, the Empire State Manufacturing Survey and Industrial Production.
On Friday there is quadruple witching which typically causes a spike in market volatility as well as the Consumer Price Index and Consumer Sentiment.
The stock markets gapped lower on Friday in reaction to comments by a Fed governor. This combined with the lack of action from the ECB clearly spooked the market as many are fearful of a rate hike this month. I continued to think this is unlikely and as I have pointed out many times in the past in the early stages a pattern of rising rates is not typically negative for stocks.
The Dow Industrials and S&P 500 lost 2.2% and 2.40% while the small cap Russell 2000 was down 2.60%. The weekly A/D numbers were quite negative with 2500 stocks down and just 630 up.
The selling was steady for most of the day but accelerated in the last 30 minutes of trading as there seemed to be a fair amount of panic liquidation. The ARMS index closed at 1.70 and the market internals were extremely negative with just 173 up and 2951 down. This extreme reading strongly favors a very sharp rebound by mid-week.
The Spyder Trust closed well below the daily starc- band at $215.45 with the weekly at $211.70. The August low at $214.25 was decisively broken as the SPY closed below the 20 week EMA. In the past this has typically represented a good level of support.
There is a band of support, line a, in the $210-$212 area that could be tested over the short term but on an oversold bounce the SPY could easily move back to the $215-$216 area.
The weekly S&P 500 A/D line has turned down but is still well above its rising WMA. The daily A/D line has dropped below its WMA but is still well above the support from the August low.
The small cap iShares Russell 2000 (NYSEARCA:IWM) also closed on it daily starc- band while the weekly is much lower at $116. There is a band of support in the $120 area and then at $118, line a, which corresponds to the June high.
The daily Russell 2000 A/D line made convincing new highs last week but dropped below its rising WMA on Friday. There is more important support from the April-June highs at line b. The A/D line pattern suggests that if it is going to top out it will take some time for the WMA to flatten out and then turn lower.
What to do? In the past few weeks I have noted that there was some improvement in the weekly and daily A/D analysis as well as the increase in bearish sentiment from Wall Street. This made me conclude that any sharp market correction would not last very long and should be a buying opportunity.
Now that the market is seeing its first heavy selling since June the next week or so become more important It is still my view that even a further decline to the 2100 area in S&P 500 will be well supported and that it will set the stage for a resumption of the market's uptrend.
At this point I still think the odds of a deeper and longer lasting correction are still low but it will be the strength of the first market rally that will clarify the outlook. If we do eventually have a market correction that lasts into October I still expect the stock market to be higher going into the end of the year.
Viper ETF clients are long a number of different sector ETFs and have bought some others as they have dropped to more important support. The sharp decline has already taken some of the high-flying global ETFs back to good support that should create a good buying opportunity.
For stock traders some of our short positions got hit quite hard and we gave up some profits on our long positions. There are still a number of stocks that appear to be completing good bottom formations and may be the new market leaders when the correction is over.
The Viper Hot Stocks Report recommends both long and short stock positions based on the weekly scans as well as the monthly indicators. There are currently an equal number of short and long positions in the trading portfolio.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.