President Obama has broken long-term resistance in his battle with Mitt Romney. How are the markets and economy reacting? MoneyShow's Tom Aspray shares his key concerns for the continued health of the post-QE3 rally.
Stocks tried to turn higher on Friday, but sold off in late trading to close the week lower. So far, the pullback from the post-Fed rally has been mild, with the major averages down just slightly from the highs.
The correction camp seems to be getting a bit more crowded lately, while many of the more outspoken bears, those who can’t make sense of the rally, have become less vocal.
It is a concern that some of the long-term bears have changed their tune. In the past, this has often led to sharp market corrections.
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On most investors' minds is the upcoming election and what impact it will have on the markets and the economy. Whatever your political affiliation, it is definitely worth keeping an eye on Intrade.com.
One group of traders have already decided who they think will win the election. Last week was not a very good one for candidate Romney, but the tables could turn and maybe next week it will be President Obama’s turn. The chart above (courtesy of www.intrade.com) shows the current market data of those predicting an Obama win in the election.
The chart was in a broad trading range from May 2011 to September 2012, when it staged a high-volume breakout above the resistance at line a. Technically, this completes the bottom formation (lines a and b), with the initial upside target at $8.20. There is good support in the $6.20 to $6.50 area.
Intrade values the share price at either $10 or $0 once the election is over. Those who purchased the Obama shares will get $10 a share if he wins or $0 if he loses. Of course, you can also sell short, so anyone who doesn’t think Obama will win the election could sell the shares short around noon Friday at $7.18 and if Obama loses it would drop to $0.
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Alternatively, you take the other side if you are predicting a Romney win. The chart of those predicting a Romney victory appears to show the completion of a double top formation (line a). This year’s uptrend (line b) was tested in July and August, but was decisively broken this month.
The solid uptrend from the 2011 lows (line c) has just been broken, as the price has dropped well below $3. The chart now shows heavy resistance in the $3.80 to $4 area.
Of course, this data should be taken as just one piece of information, although they were right in 2008 and called the very tight 2004 presidential race correctly. They even got each state winner right.
NEXT: The Larger Economic Picture
|pagebreak|Other than the violent drop in crude oil prices that began last Monday, it was not a wild week in the markets, though crude lost over $6 per barrel.
New concerns surfaced over the looming Greece bailout confrontation. It has yet to be determined who will have to make concessions to ease their debt burden. Further deterioration has taken place in the Greek economy, and leaders are hoping to obtain a two-year extension of their deadline to implement austerity measures.
The Bundesbank has continued to criticize the ECB bond-buying program, and the fact that their new headquarters is now $450 million over budget has not helped their image. The IMF’s board is also reported to be displeased with its large exposure to Greek debt, which may make further concessions difficult.
Outside funding is also tough. Last week, 12-week Greek T-bills were yielding 4.31%. On the plus side, Spain’s bond action went well, as they sold $6.26 billion worth of bonds.
On the economic front, the primary concern is the manufacturing sector, as purchasing managers' reports in the Eurozone, Germany, France, and China have all dropped below the 50 level. When these readings drop below 50, it indicates a contraction in business activity.
China’s did improve from the prior month, and the strengthening in the yuan last week was taken by some that their economy may be finally bottoming.
Last week’s Philadelphia Fed Survey surprised many. It rose to -1.9, well above the consensus forecast of -4.0. New orders were strong, the first positive reading since last May.
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Overall, the housing data was strong. Though housing starts slipped a bit, existing home sales rose sharply again in August, to the highest rate since May 2010.
The leading indicators were also released last week by the Conference Board, and were down 0.1%. The LEI is a composite index of ten economic indicators.
The conclusion of the Conference Board was that “that the pace of growth is unlikely to change much in the coming months.” Their long-term chart is still in its major uptrend, and it would take many months before it could top out. Their Web site is great if you are interested in economic data.
This week, there is a pretty full calendar, starting on Monday with the Dallas Fed Manufacturing Survey. Tuesday follows with the S&P Case-Shiller Housing Price Index and consumer confidence numbers.
Additional information on housing is due Wednesday with new home sales, while the GDP, durable goods, and jobless claims are out on Thursday.
Things do not slow down much Friday, as we get the latest data on personal income and outlays, as well as the Chicago Purchasing Managers Index and the final estimates of consumer sentiment from the University of Michigan.
NEXT: What to Watch
|pagebreak|What to Watch
Though the corrections in the major averages last week were not that severe, the weak close on Friday makes a further drop early this week more likely. Several stocks like Bed, Bath and Beyond (BBBY) and JCPenney (JCP) were hit hard, dropping 9.8% and 11.2% respectively on Thursday.
If you listen to the TV financial media (I don’t recommend it), there now seem to be quite a few more looking for a correction, but they are bullish on the longer term. Maybe they will all be right this time, but often the correction is so sharp that they no longer want to buy.
The individual investor is still not convinced. Only 37.5% are bullish, while the financial newsletter writers have risen to 54.2% bullish, which continues to be uncomfortably high. Mutual fund flows indicate that the majority of the money is still flowing into bonds, not stocks.
Interest rates are well above the July lows, and as I discussed Friday, the iShares Barclays 20+ Yr Treasury Bond (TLT) is reaching a critical juncture.
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The daily chart of the NYSE Composite shows that it dropped back to test the April highs (line a), and then tried to turn higher Friday. There is stronger support at 8,245 and the 20-day EMA, which is about 1.6% below Friday’s close.
The longer-term analysis of the NYSE Advance/Decline lines continues to be positive for the intermediate term. On a short-term basis, the A/D line turned up Friday, and a move above the previous high would signal another sharp push to the upside.
The A/D line has support at the uptrend (line e) and the rising WMA.
S&P 500
The Spyder Trust (SPY) was not able to hold its early gains on Friday, as it closed lower. There is minor support at $145.63, which was last week’s low.
Below that, the 20-day EMA is at $144.30, with the breakout level at $143.20. There is further support in the $140.40-$140 area, which includes the uptrend (line g).
The S&P 500 Advance/Decline line corrected all week after breaking through the bearish divergence resistance (line h) that went back to the April highs. The A/D line now needs to surpass the recent highs to confirm the breakout.
The first real resistance is at $148.11 and the recent highs, with psychological resistance in the $150 area.
Dow Industrials
The SPDR Diamond Trust (DIA) also traded in a tight range last week, with the high at $136.24 and the low at $135. This is in contrast to the prior week’s $6 range.
The first real support is around $133 to $133.60 and the 20-day EMA. There is further support in the $131.50 area.
The long-term resistance from the 2007 highs is in the $137.90 to $141.95 area.
The Dow Industrials A/D line (not shown) did break its downtrend from the May highs, but is still badly lagging the price action.
NEXT: Technology, Sector Focus, and Tom's Outlook
|pagebreak|Nasdaq-100
The PowerShares QQQ Trust (QQQ) continued to push to the upside last week, as it made marginal new rally highs at $70.58.
The long-anticipated release of the new iPhone helped Apple (AAPL), as it gained another $8.60 for the week. It is getting close to my next upside targets, and I will likely be writing more about it this week.
The daily chart of QQQ has first support at $69.55 and the early September highs, with more important levels at the April highs (line a) at $68.60.
After breaking its downtrend, the Nasdaq-100 A/D line (line b) has failed to generate any upside momentum. It is acting much weaker than prices. As I said last week, “the rally in the Nasdaq needs to become more broad-based for the A/D line to catch up with prices.”
For this week the weekly Starc+ band is at $72.90.
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Russell 2000
The iShares Russell 2000 Index (IWM) closed higher Friday, consistent with the resumption of the uptrend. The Russell 2000 A/D line has also turned up, and looks much stronger than those of QQQ or DIA.
The first support at $84.60 was tested last Thursday, with further levels in the $83 to $83.50 area. The key level of support is now waiting in the $79 to $80 area.
Sector Focus
The iShares Dow Jones Transportations (IYT) is still sending the strongest warning about the overall market, as I discussed two weeks ago in “One Sector Sends a Strong Warning."
The outlook has turned more negative this week, as after briefly exceeding the downtrend (line a), it dropped sharply. The previous low (line b) has been broken.
The relative performance has dropped to new lows, and shows no signs yet of bottoming. It was hurt last week by Federal Express (FDX), which is now close to making new lows for the year. The on-balance volume (OBV) on IYT barely rose on the rally, and then volume picked up on the downside.
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Most of the other sectors also closed the week lower. The Select Sector SPDR Health Care (XLV) performed the best, up 1.5%, and the Select Sector SPDR Consumer Staples (XLP) was up 0.8%.
The Select Sector SPDR Financial (XLF) was hit the hardest, down 2.6% for the week, after moving decisively above the March highs the previous week. The next support is at $15.50, with the 38.2% Fibonacci retracement support at $15.17. The 50% support level is at $14.88.
The RS line has dropped below its WMA, but is still above its breakout level. The OBV is now testing its WMA, as the volume was not that heavy last week.
The Select Sector SPDR Materials (XLB), Select Sector SPDR Energy (XLE), Select Sector SPDR Industrials (XLI) were also all down over 2%.
NEXT: Oil, Metals, and Tom's Outlook
|pagebreak|Crude Oil
The November crude-oil contract bounced late in the week, but still closed sharply lower, as it reached the next strong zone of support at $90 to $92.
The key support is at $87.50. It is too early to tell if the current drop is a buying opportunity or not.
Precious Metals
The SPDR Gold Trust (GLD) closed the week at its best level since February, and looks ready to challenge the next major resistance in the $174 to $175.50 area.
The daily OBV (not shown) has confirmed the price action, and shows no signs yet of a top. The acceleration on the upside suggests it may soon be time to take some short-term profits in GLD and IAU.
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Some are looking to the gold miners to catch up, but as I mentioned in late August, I was not interested in buying Market Vectors Gold Miners (GDX).
The chart above shows the performance of GLD and GDX going back to the start of 2007. It reveals that GLD is up close to 180%, while GDX is just up 37.8%. There may come a time when the technical action of the miners improves, but they are likely to get hit hard when gold does correct.
The Week Ahead
The late sell-off on Friday, combined with weakness in some of the key sectors, suggests that the correction is not over yet. It is possible that we will get another bit of Eurozone news this week to spook the markets. And the action of the Dow Transports still needs to be watched closely.
Though there is plenty of economic data that could disappoint the markets, it would probably take several bad numbers to trigger heavier selling. I am still looking to become more invested, but only if the stocks drop back to stronger support, like AutoZone (AZO) did last week.
If you are not invested in the stock market, I would still recommend a gradual approach. That is 1% to 2% on any sharp down day. Once the correction is over, it will be a time to be more aggressive.
- Click here to see the current Charts in Play Portfolio.
- And don’t forget to read Tom's latest Trading Lesson, Are May's Top Groups Still Leading?
