The Week Ahead: How Important Is China or The Dollar To Your Portfolio?

The focus last week was on the devaluation on the Chinese Yuan that sent the global stock markets down sharply early last week and the outlook for China, as well as its currency dominated the focus of many analysts.

Basing one’s investment strategy on where the Chinese economy is headed has left many out of US stocks for the past few years. Some that took a macro view were convinced that the US stock market could not move higher while the Chinese economy was contracting. Though one cannot ignore the impact of global developments on the US stock market they should be viewed in the context of the long term trends.

The emerging market currencies were already under pressure before the Chinese acted and dropped even more as the Yuan was devalued. Most analysts in a Bloomberg survey are looking for further declines in most of the emerging markets through the middle of next year. One well known analyst thinks many could lose another 30-50% but maybe bearish sentiment is getting too high.

Fig1

It should be no surprise that 2015 has been a rough one for many of the emerging countries stock markets. A broad measure of emerging markets such as the MSCI Vanguard Emerging Markets (VWO) that was discussed last week was up over 10% in April and May. It is now down over 7% but is still doing much better than the iShares MSCI Turkey (TUR), the Market Vectors Indonesia ETF (IDX) and iShares MSCI Brazil Capped (EWZ) which are all down well over 20%.

The individual country ETFs, as I have always stressed when advising clients, are more suitable to trading than investing because of their volatility. They have had some years of great performance in the past few years as the iShares MSCI Turkey (TUR) was up over 66% in 2012 but down 27% the next year.

Fig2

The dollar index looks ready to close the week below the doji low from the end of July. This low close doji sell signal (LCD) signal was developed by John Person. It is generally quite reliable especially when it agrees with other technical studies. For example the September 2012 weekly LCD sell signal in Apple, Inc. (AAPL) was followed by a 40% decline in the stock.

By the week of April 24th the weekly on-balance volume (OBV) on the dollar index had already been below its WMA for a week. The OBV has just rallied back to its declining before turning lower which is typically is a bearish sign. The Herrick Payoff Index (HPI) also turned negative in April by dropping below its WMA. It has continued to decline.

The major 38.2% Fibonacci support and the monthly pivot support are both in the 92.42 area. A drop to this area would be a decline of 4.2% from current levels. This a type of decline could help some of the large multi-national companies whose earnings have been hurt by the strong dollar. I think such a decline would generally be a positive for the US stock market and do not think that China will alter its major trend.

The Markets

Even though the US stock market has seen two sharp rallies in the past two weeks there is no strong evidence yet based either the daily or weekly technical studies that the market’s correction from the June highs is over. Therefore as I stressed in the middle of last week in ” Please Wait Until The Dust Settles” it is not yet the time to be an aggressive buyer of the overall market.

Fig3

The first evidence that the correction is over will come from the daily studies which will be covered in the Market Wrap section after the market closes on Friday. The best buying opportunities for the overall market come when both the weekly and daily technical studies are both positive.

The weekly chart of the S&P 500 shows that the twenty-two week trading range, lines a and b, is still intact. A few hours before the close the S&P is trading just above the quarterly pivot at 2082 as it closed just below it last week. The weekly starc- band is at 2035 with the quarterly pivot support at 2029. There is initial resistance at 2112-2114.

The weekly S&P 500 A/D has turned up but is below its WMA. There is still a pattern of lower highs, line c, consistent with a market that is correcting. A move back above its WMA and this resistance would be positive. The A/D line has long term support at line d.

Just two weeks ago the AAII reported that the % of bearish individual investors jumped to 40.7% and at the time I wondered if the bearish sentiment was high enough? I my analysis I have found the % of bullish individual investors to be a more reliable indicator and the reading of 21.1% was low enough to get my attention.

Last week both the bullish % and bearish sentiment moved higher. The bullish % jumped to 30.5% while the bearish % is now at $36.5% up 4.5% for the week. The neutral camp accounts for the change as it now stands at 33.4%.

Fig4

The Euro Zone markets closed most lower as there are no clear signs that the Dax has completed its correction as is traded in a wide range last week. The economic data from the Euro zone came in weaker than expected as this table from Bloomberg indicates. For the first time in a year France showed no growth while Spain reported a 3.9% annual growth much better than Germany’s 1.8% GDP.

Late Friday the Euro zone finance ministers approved a 86 billion Euro bailout plan for Greece. My favorite ETF for Europe is the Vanguard MSCI Europe (VGK) which closed the week a bit lower. It still does not appear to have completed its correction.

Interest Rates & Commodities

Fig5

The yield on the 10 -year T-Noted closed a bit higher last week as the uptrend for the lows early in the year, line b, is still intact. It currently stands at 2.084%. The long term downtrend from the 2011 high, line a, is now at 2.660%. The weekly MACD has crossed below the zero line and the MACD-His has turned negative. This means one should keep a close eye on rates in the weeks ahead.

Fig6

The gold futures closed higher and above last week’s doji high so a high close doji (HCD) buy signal was generated. The next resistance is in the $1130 area with major resistance still in the $1155 area, line a, and the declining 20 week EMA.

The weekly studies have turned up but the OBV is well below its declining WMA. There is more important OBV resistance at line b. The Herrick Payoff Index (HPI) measures money flow using volume, open interest and prices. The weekly HPI gave advance warning of the sharp drop in prices and is still solidly in the sell mode. The daily HPI (not shown) is now closer to turning positive.

Crude oil was hit hard again last week losing another $1.71 per barrel and closing below the lows from early in the year. Bearish sentiment is very high on crude oil yet the sellers are still in charge. There are no signs yet of a bottom basis either the daily or week technical studies yet I think a sharp short covering rally is likely in the next few weeks.

Surprisingly the International Energy Agency reported last week that demand for crude is increasing at its fastest pace in five years and this could eventually trigger a short covering rally.

The Economy

Overall the economic data was pretty good last week as Tuesday’s numbers on Productivity were better than expected and Thursday’s Retail Sales were also a bit better than expected. Further improvement is needed in the next few months to signal that the consumer is really back in a spending mood.

On Friday the Producer Price Index was a bit higher than expected and Industrial Production rose to 0.6% based on higher vehicle production. The mid-month reading on Consumer Sentiment from the University of Michigan saw a slight decline to 92.9 from July’s closing reading of 93.5.

This week starts off with the Empire State Manufacturing Survey and the Housing Market Index which is one of the best readings of home builder sentiment. Then we get Housing Starts on Tuesday which may give the home building stocks an additional boost. The iShares Home Construction ETF (ITB) has been leading the market higher as it has outperformed the SPY by over 8%.

After the higher than expected PPI last week many will be paying more attention to Wednesday’s CPI report well as the afternoon release of the FOMC minutes. Then on Thursday we get the Philadelphia Fed Business Survey, Existing Home Sales and the Leading Economic Indicators.

Market Wrap

The higher close Friday kept the major averages in positive territory for the week as the Dow Industrials were up 0.60% and the S&P 500 gained 0.67%. The Dow Utilities led the gaining 2.34% while the Nasdaq Composite was up just 0.09%. The advancing stocks led the decliners by a 1.5 to 1 margin but there were 379 new lows but just 164 new highs.

Aside from the utilities the big winners were the oil & gas stocks which were up 3.07% followed by a 1.1% gain in the industrial stocks. The other sectors were up less than 1% with the consumer goods just barely in positive territory for the week.

Fig7

The daily chart of the Spyder Trust (SPY) shows that it closed just barely below the declining 20 day EMA. The daily downtrend is in the $210 area with more important resistance at $211.45. The daily starc+ band is at $213.13. The monthly pivot support was tested on Wednesday with the low at $205.36.

The S&P 500 A/D line turned up Friday but is still below the highs from earlier in the week. There is more important resistance for the A/D line at the downtrend, line b. The daily OBV is still well below its daily downtrend, line c, and its WMA.

Fig8

The iShares Russell 2000 dropped down to the $118 level on Wednesday before rebounding but it still closed below the chart resistance in the $120.60 area. The declining 20 day EMA is at $121.71 with the downtrend, line a, now at $124.20.

The Russell 2000 A/D line made new lows last week before turning higher. It is still slightly below its declining WMA while the downtrend, line b, is much higher. The OBV made sharply lower lows , line d, before turning up on Friday. A further rally in the OBV is likely to fail at it’s declining WMA.

There are now more stocks and a few sectors like the utilities that have already completed their corrections. I continue to recommend a patient approach (Please Wait Until The Dust Settles) as I would not be buying those ETFs that track the overall market at this time. I will be highlighting some promising stocks and sectors in the week ahead.