Our Confused and Conflicted Markets: Wall Street Sector Selector Weekly Market Outlook (SPY, DIA)

Weekly stock market and ETF outlook from Wall Street Sector Selector 

“If you’re not confused, you’re not paying attention.” Tom Peters 

Certainly, management guru Tom Peters’ quote could apply to last week’s market action as we saw significant moves in both directions only to end up at about where we started the week when the markets closed on Friday. 

The markets do seem confused and conflicted as we see gold, bonds and stocks all rising in unison. 

One or more of these markets has gotten it wrong and sooner or later we’re going to find out which one it is.  Sooner could be as soon as this week with significant economic reports coming our way. 

Looking At My Screens

 As always, the chart tells the story:

chart courtesy of StockCharts.com 

In this chart of the S&P 500 we see RSI at overbought levels and if you look back to early August and early April, you’ll find similar levels soon followed by significant declines.  In “normal” market conditions you don’t see RSI at extreme overbought/oversold levels as often as we have lately, but typically, this is a very reliable indicator when these situations occur. 

Resistance marked by the horizontal red line is at the 1150 level and a break above here would indicate higher prices ahead. 

In the bottom display, the Full Stochastic is on a “sell” signal and in Overbought territory, and while this can be a choppy indicator, looking back to April, June and August, we can see similar levels followed by significant declines. 

To make matters even more interesting, one needs to consider these tantalizing facts: 

*****Dow Theory, the oldest technical trading program in use today, will go on a “buy” signal when the Transports break the August high of 4516.35.  Friday’s close was 4515.01, just one point away from this significant line in the sand. 

*****Seasonality points to the fact that many significant stock market declines have occurred after the autumn equinox and in the month of October.  In fact over the last 13 years, there have been 11 significant declines during this time frame for a probability of 85%. 

*****Three significant crashes have occurred in the month of October; October 29, 1929, October 19, 1987 and “black week” starting on October 6, 2008 during which the Dow lost 18% or 1874 points in five trading days. 

*****The AAII Investor Sentiment Index is at 45% bullishness which is similar to levels seen prior to several major market corrections. 

The View from 35,000 Feet 

On a fundamental level, the news remained dismal last week with weekly unemployment rising and Rite Aid and AMD not reaching earnings expectations. 

The Senate postponed voting on extending the “Bush Tax Cuts” until after the election which adds uncertainty to the picture and Ireland slipped into a double dip recession with a contraction in its 2nd Quarter GDP. 

Existing home prices declined in July by -0.5% and the FOMC said it stands ready with more quantitative easing, effectively telegraphing a move in that direction at their next meeting. 

August Durable goods orders declined -1.3% from the previous +0.7% and August New Home sales rose, although this was the second worst report on record and so offers small comfort to the beleaguered real estate market. 

But stocks rallied on Friday on the hope of the “Bernanke Put” which says that the Fed will not let asset prices decline even if it means trashing the U.S. dollar for the rest of our lifetimes.  

That possibility, of course, is why gold is rallying through the psychologically important $1300 level.  While a record, gold still stands far below its all time inflation adjusted high of $2318 and so could still have lots of room left to run. 

Household net worth declined $1.5 Trillion in the 2nd Quarter and now stands 15% below its 2006 peak.

What It All Means

It’s now the Federal Reserve and the central banks of the world marshaled against a growing tide of deflation and economic deceleration.  The record of success of quantitative easing is spotty at best and so we can only wait to find out if “things are different this time.”

The Week Ahead 

As I mentioned at the outset, today’s markets are conflicted and confused, however, it’s likely we’ll soon gain some clarity with significant economic reports coming at us all week.  

Pay particular attention to the Q2 GDP revision and Chicago PMI on Thursday and the blizzard of reports on Friday that include income, spending, consumer sentiment, construction spending and the all important ISM, Institute of Supply Manufacturing September report. 

These data points should be significant enough to push markets higher or lower in a meaningful way and so by next weekend the way forward should be in sharper focus. 

Wall Street Sector Selector remains in the “Red Flag” mode, expecting lower prices ahead. 

Economic Reports: 

Tuesday: 

0900: July Case/Shiller Home Index

1000: September Consumer Confidence 

Thursday: 

0830: Q2 GDP Revision

0830: Initial Unemployment Claims, Continuing Unemployment Claims

0945: September Chicago PMI 

Friday: 

0830: August Personal Income

0830: August Personal Spending

0955: September University of Michigan Consumer Sentiment Final Report

1000: August Construction Spending

1000: September ISM

1400: September Car/Truck Sales 

Sector Spotlight: 

Leaders:  Bonds, Thailand, Peru 

Laggards: Regional Banks, Real Estate, Financial Services 

.It’s a beautiful Indian Summer weekend in Bend and I hope you’re enjoying these first days of Autumn, as well, because surely winter is rapidly approaching.

Disclosure: SEF, SH, VXX, SPY Put Option

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