The Week Ahead: A Replay of 2011 or 2012?

The stock market bulls finally threw in the towel last week as the selling accelerated from the opening last Thursday and was heavy into the close on Friday. The sideways trading over the past three months appeared to have been a tug of war between the bulls and bears. As I have been pointing out since early July (Greece Isn’t The Real Problem) investors should have been worried about the technical deterioration not Greece. The uptrend in the major averages was accompanied by a downtrend in the A/D line which was a sign that just a small number of stocks were pushing the market higher. after last week how much more can stocks decline before the correction is over? The Markets The sharpest correction in the current bull market occurred in 2011 as the selling was exacerbated by the debt ceiling crisis and the downgrade of US debt. The stock market had turned higher in September of 2010 as the weekly S&P 500 A/D line had started a new uptrend by moving above the previous highs (point 1). The weekly A/D line stayed well above its rising WMA until June 2011 as the Spyder Trust (SPY) rose from $102 to a high of $127 in May 2011. The S&P 500 A/D line dropped below its WMA in early June and stayed below it for five weeks. In late June and early July, the market rose sharply taking the SPY just a point shy of its previous peak. Two weeks later, the SPY closed at a slightly new rally high but the A/D line formed lower highs, line b. On...

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. 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,...

Please Wait Until The Dust Settles

The strong rally Monday gave the bulls some hope as some investors jumped into the most beaten down market sectors like the materials and industrials as the Materials Sector Select (XLB) and Industrials Sector Select (XLI) were up 2.4% and 2.1% respectively. This came after last Wednesday’s sharp gains which caught even more traders by surprise, myself included. The further overnight weakening of the Chinese Yuan has pushed the Dow futures down over 100 points as the European markets are also down sharply as the Stoxx Europe 600 is down over 2% ahead of the US opening. Though many are tempted to step in and buy some of the beaten down high yield large cap stocks one should remember that historically there are not many beaten down stocks that turn around quickly and start a new uptrend. Just over a month ago the markets were focused more on Greece than the impact of China on the world markets but as I discussed in early July “Greece Isn’t The Real┬áProblem” the breakdown in the technical outlook, especially the advance/decline lines was what investors should really be concerned with. Therefore the rally in early July I felt should not be trusted and this is also true of the sharp rallies in the past week. The narrowly based nature of the Nasdaq 100’s new high on July 20th was a further warning to investors and presented new opportunities for traders. One missing ingredient in the current market decline has been the lack of any panic selling but this may finally change this week. That does not mean that the market will immediately...

The Week Ahead: Market Wrap

Market Wrap Stocks were hit hard in early trading Friday but did manage to stabilize in afternoon trading as most of the major averages closed well above the day’s lows. The Dow Industrials lost 1.8% for the week as it was the seventh day in a row that the Dow declined. The Transports were not far behind as they lost 1.7% while the Utilities were one of the bright spots as they were up 1.1%. The S&P 500 was down 1.25% which was a better than the 2.6% drop in the small cap Russell 2000. The NYSE Composite was down 1.1% and the negative weekly A/D ratio has kept the NYSE A/D line (not shown) in its downtrend and below its WMA. The Spyder Trust (SPY) dropped to test the daily starc- band and the quarterly pivot at $207.38 before closing well above the day’s lows. The late July low at $206.26 is still holding with the monthly pivot support at $205.36. There is important support in the $204.50-$205 area, line b. There is short term resistance at $209.72 and the declining 20 day EMA with further at $211.45. The S&P 500 A/D line is slightly below its WMA but shows no increase in downside momentum. The A/D line has key resistance at line c which needs to be overcome to signal that the correction is over. The daily OBV has broken its uptrend (line d) and is now in a clear downtrend. The PowerShares QQQ Trust (QQQ) lost 1.47% for the week as the biotech stocks were hit with heavy selling. The iShares Nasdaq Biotechnology ETF (IBB) lost...

3 Sectors For The Next Bull Run

The stock market has started off the month of August on a relatively weak note yet so far no heavy selling has developed in the major averages despite the sharp decline in market bell weather Apple, Inc. (AAPL). The multiple time frame volume analysis of AAPL still points lower as there has been no improvement since last month’s review “Volume Warned of Apple’s Drop”. The A/D line analysis of the NYSE Composite, S&P 500, Nasdaq 100 and Russell 2000 is still in the corrective mode so a further decline cannot be ruled out. It would take a drop below last week’s lows in the major averages to trigger heavier selling. The futures are sharply higher in early trading despite the fact that market leader Disney (DIS) is down 8% ahead of the opening. Of course the close is what is important and would take take several days of strong A/D numbers to indicate that the market has really bottomed out. The month end analysis of the key sectors shows that the leadership role has been taken over by the Consumer Discretionary Sector Select (XLY) as it is now up 11.2% versus just a 2.4% gain in the Spyder Trust (SPY). It started to outperform the Health Care Sector Select (XLV) last week as it is up 10.1%. They are the only two double gainers so far this year as the XLE, XLI and XLB are the weakest. All are below their quarterly pivots . There have also been some significant changes in both the weekly and monthly technical studies for many sectors though both time frames are negative for...

The Week Ahead: Is Bearish Sentiment High Enough?

The weakness in the Shanghai Composite spooked investors at the start of the week but they seemed to be less concerned as the week progressed since the Composite lost another 10%. It was the worst month for the Shanghai Composite in the past six years. As the US market gapped lower to start the week the full slate of earnings reports and economic reports made many nervous. Therefore the 1.20% gain for the week in the Spyder Trust (SPY) was a pleasant surprise. The earnings seasons has been a positive for the market though several companies did disappoint. Thomson Reuters is looking for a 0.8% gain in earnings which was considerably better than the pre-earnings estimate of a 1.2% decline. As the market moved higher last week individual investors became more bearish according to AAII. The questions is are they bearish enough to support a broad based market rally that can move all the major averages to new all time highs? The Markets In last week’s American Association of Individual Investors (AAII) survey the % of bearish individual investors jumped 15.1% to 40.7% which is well above the long term average of 30.3%. This is the highest reading since August 22, 2013 (point 1). It had spiked in April of that year with back to back readings of 48.2% and 54.5% (point 2). These extreme readings in 2013 just corresponded to just brief interruptions in the major stock market rally of 2013. These high readings occurred while the 20 week MA was falling which confirmed that the bearish % was still in a downtrend. This was in contrast to...