Seems like there’s always something new on the investor’s wall of worry and since the markets survived the FOMC meeting, MoneyShow’s Tom Aspray questions if a too successful IPO will now be the thing to keep investors on the sidelines.
Despite what many feared just after the Labor Day holiday, the markets did survive the FOMC meeting. There was considerable selling up through last Tuesday morning when a Wall Street Journal reporter’s comments apparently convinced the market that the Fed was not going to change its policy.
This sparked a rally that pushed the S&P 500 and Dow Industrials to further new record highs. It is too early to tell exactly who was selling on the correction but I would expect it came mostly from individual investors. At the early August lows, $16.3 billion came out of US stock ETFs and $2 billion out of mutual funds.
This has been the trend for most of the bull market as there has been a number of panic selloffs where many investors ended up selling near the correction low. It seems like there is always something new on the investor’s wall of worry.
Now it may be a too successful Alibaba IPO that will resurrect the bubble talk and keep investors on the sidelines. No matter what happens to the stock price down the road, I am sure this IPO record will last for some time. The average investor was unlikely to get any of the shares, which probably reinforces the view that the investment playing field is not level.
I would not be surprised to see a number of articles in the coming weeks that warn investors that the last time the IPO market was so frothy was just before the dot.com bubble burst in 2000. In Friday’s Wall Street Journal’s article Alibaba Mania Isn't Built to Last they warn that a sky high price of Alibaba Group (BABA) is likely not sustainable.
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Most IPOs are not suitable for the individual investor as many still remember the wild ride Facebook (FB) had after its IPO. I think investors would be better off paying attention to the subtle changes that have recently occurred in the interest rate markets. The chart shows that since May the yield of the 2-Year T-Note has been moving higher, line a, at a greater rate than the longer-term rates. They hit the highest yield since 2011 last week.
This is in contrast to the yield of the 10 Year T-Note, which formed lower lows during the same time period, line c. The 10-Year yield has not risen as much on a percentage basis. The downtrend in yields, line b, was broken in the past week. This narrowing of the yield spread between the two is a sign that some are already preparing for next year’s rate rise.
I have been concerned since early August (Will Bond Fund Holders Be Singing the Blues?) that holders of bond funds might be in for a rude awakening by the end of the year if they suffer capital loses that are greater than their yield income.
In early September, there were signs of heavy selling in some of the junk bond ETFs, which was also a further reason for concern. Therefore, investors should look carefully at the maturity of any bond fund holdings as shorter maturity bonds will be less vulnerable when rates do rise.
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The asset performance chart has undergone quite a few changes since the start of the summer. The positive trends in the iShares 20+ Year Treasury Bond (TLT), the Vanguard FTSE Emerging Markets ETF (VWO), and Spyder Trust (SPY) are still intact. Both the VWO and TLT have declined significantly this month as VWO is down over 5% from its high. Neither yet shows a change in their trend.
The SPDR Gold Trust (GLD) has really broken down over the past month and is now negative for the year. This is consistent with the continuation patterns and negative OBV patterns that I noted for both gold and the gold miners.
The selling in the Vanguard FTSE Europe (VGK) has also been quite heavy but it and the SPDR Euro Stoxx 50 (FEZ) appear to have completed their corrections. Those companies that benefit from a weaker euro should do well and I expect the EuroZone economies to be much better by yearend.
NEXT PAGE: What to Watch
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Last week’s economic data was somewhat obscured by the FOMC meeting and the Alibaba IPO. The week started with a strong reading from the Empire State Manufacturing Survey as it rose 12 points to its highest level since 2010. This is consistent with last month’s breakout in the Philadelphia Fed Survey as its downtrend, line a, was overcome. The survey dipped a bit this month to 22.5, down from July’s reading of 28.
In contrast, the Industrial Production at -0.1% was weaker than expected The Consumer Price Index came in lower than expected, which gave support to those Fed governors who are not eager to raise rates.
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The data on the housing market was mixed as starts dropped in August but most of the decline came in multi-family dwellings. The moving average analysis of both the housing starts and the permits has turned higher from early in the year so the trend looks positive.
The Housing Market Index surged to 59 in September, which was a breakout above the 2013 high (line a). This index warned of the turn in the housing market in 2006 (see arrow) well ahead of the financial crisis.
On Monday, we get more on housing with the release of Existing Home Sales, which will be followed by the New Home Sales on Wednesday. Also on Monday we get the Chicago Fed National Activity Index.
Manufacturing takes center stage Tuesday with the PMI Manufacturing Index Flash and the Richmond Fed Manufacturing Index. Then on Thursday, we get the Durable Goods report followed by the final reading on 2nd quarter GDP and Consumer Sentiment on Friday.
What to Watch
The stock market had a wild ride last week as the orderly pullback I was looking for last week ended mid-day Tuesday as stocks reversed sharply to the upside by the close. After Wednesday’s close, my analysis (Sell the Rumor and Buy the News?) was that the market needed to prove itself of the upside to confirm that the correction was over.
This required strong advance/decline numbers, which we have not yet seen in the broad market. Heading into the close on Friday, the declining stocks are leading the advancing stocks.
This has turned the daily analysis mixed on the NYSE Composite. The technical outlook for the Spyder Trust (SPY), SPDR Dow Industrials (DIA), and PowerShares QQQ Trust (QQQ) are acting mush more positive. The positive weekly volume analysis does favor an eventual upside resolution.
The number of bullish investors, according to AAII, rose from 40.38% to 42.24% last week. It spiked to 51.9% on August 28. The bearish percentage has declined further to 22.98%.
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The 5-day MA of the number of S&P 500 stocks above their 50-day MAs is still declining as it rose just above the 65% level in early September. The raw data did turn up last week but it has yet turned the MA higher. Overall, I would rate it as neutral.
Last week I updated my analysis of both the healthcare and biotechnology sectors with one new healthcare stock I liked.
There are several industry groups in the financial sector that are emerging as market leaders. There are three ETFs that cover these industry groups and I am looking for stocks where the risk can be well controlled.
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The daily chart of the NYSE Composite (NYA) shows that it formed a doji last Monday at the monthly pivot of 10,886. A high close doji buy signal was triggered the following day (see arrow). It would take a drop below the doji low (10,881) to reverse the buy signal.
There is further support at 10,862 and the 20-day EMA. The monthly projected pivot support is at 10,717 with the longer-term uptrend in the 10,650 area.
The daily NYSE Advance/Decline has turned up from the lows but is still below its declining WMA and the resistance at line a. The A/D line needs to move above this level to confirm that the broad market correction is over.
The McClellan Oscillator hit -191 Monday and hit a high of -64 on Thursday before turning lower to close at around -100 on Friday.
A daily close above the resistance at 11,000 is needed to turn the daily chart positive.
NEXT PAGE: Stocks
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The Spyder Trust (SPY) looks considerably better technically than the NYSE Composite as it did make a new closing high. On Friday, it pulled back to its 20-day EMA.
There is next good support in the $189.38-$199.50 area. A drop below this level would suggest a decline to the monthly pivot and daily starc- band at $197.36.
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The S&P 500 A/D moved above both its WMA and the prior peak last week, which is a positive sign. A move to convincing new highs will be bullish. The A/D line has support at line a.
The daily on-balance volume (OBV) rallied back above its WMA last week but has not yet been able to move above the resistance at line b. The weekly OBV will close the week at another new all time high, which confirms the price action.
Dow Industrials
The SPDR Dow Industrials (DIA) closed above key resistance, line a, on Wednesday and held above the breakout through the end of the week. This is a positive sign as the daily starc- band is at $173.56 with the quarterly projected pivot resistance at $175.34.
There is initial support now at $171.50 with the rising 20-day EMA at $170.63. The recent swing low was at $169.40 with the daily starc- band at $169.19.
The Dow Industrials A/D line was able to move to new highs last week as the September peak, line e, was overcome. The A/D line has confirmed the new highs with support at line f.
The daily OBV tested its previous highs but then turned lower. Would look for an upside breakout on the next rally as the weekly OBV has made a new high.
Nasdaq 100
The PowerShares QQQ Trust (QQQ) made a new closing high on Thursday at $100.28 but not a new intra-day high. The daily starc+ band is now at $101.47 with the monthly projected pivot resistance at $103.88.
The 20-day EMA is now at $99.23 with last Wednesday’s low at $98.93. There is additional support at the uptrend, line a, and the daily starc- band is in the $97.36 area.
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The Nasdaq 100 A/D line rose back above its WMA last week and broke its short-term downtrend. It has not yet made a new closing high with prices. A decline in the A/D line below the support, at line b, would be a sign of weakness.
The daily OBV did make a marginal new high last week and closed the week above its WMA. The July highs, line c, were tested on the recent correction but the weekly OBV has made new highs.
Russell 2000
The iShares Russell 2000 Index (IWM) reversed sharply to the downside on Friday after testing its downtrend, line d, early in the day. IWM closed down over 1% on the day. A close back below the $113 area would be more negative with the daily starc- band now at $111.84.
The daily A/D dropped below its WMA in early September and now shows a pattern of lower highs, line e. It turned up last week but is still well below its declining WMA.
There is a much different picture from the OBV, which is still in its uptrend, line f, and above its WMA. This suggests that the volume has been much heavier on the up days. The weekly OBV did close the week below its WMA, which is a concern.
There is initial resistance now in the $116-$116.53 area.
NEXT PAGE: Sector Focus, Commodities, and Tom's Outlook
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The iShares Dow Jones Transportation (IYT) made significant new highs again last week as it closed well above the early September highs. The monthly projected pivot resistance is at $158.02 with the weekly starc+ band at $159.33.
The volume was quite heavy Wednesday and the daily OBV made a new high, which confirms the price action. The weekly OBV is also positive. There is initial support now in the $154.50-$155 area.
The strong action of the Transports is a bullish sign for the overall market as it continues to be a market leading sector.
The Spyder Trust (SPY) and the PowerShares QQQ Trust (QQQ) closed the week higher with the QQQ now up 13.6% for the year.
The SPDR Dow Industrials (DIA) was one of the strongest last week as it is now up 4.2% while the iShares Russell 2000 Index (IWM) is down for the year.
The Select Sector Health Care (XLV) has almost caught up with the iShares Dow Jones Transportation (IYT) as they are up 17.0% and 17.4% respectively.
The Select Sector Utilities (XLU) closed the week below the quarterly pivot at $43.07.
The Select Sector Financials (XLF) had another good week and is up 8.1% for the year. It was the focus of last week’s trading lesson.
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Crude Oil
The November crude oil contract was under pressure for a good part of the week but closed slightly higher. It is trying to hold the monthly projected pivot support at $89.39. The weekly OBV is below its WMA, which is now declining slightly.
Precious Metals
The Market Vectors Gold Miners ETF (GDX) and SPDR Gold Trust (GLD) were lower again last week. As I discussed several weeks ago, the continuation patterns did favor lower prices. GLD has broken below the June lows while the GDX has not.
The Week Ahead
The short-term A/D indicators have turned up from oversold levels last week, which is consistent with the end of the correction. The lagging action of the NYSE Composite does allow for more days of choppy action before the broader market does move higher.
To signal a further and deeper correction we would need to see several consecutive days of very negative market action.
Our new buy level in the PowerShares QQQ Trust (QQQ) was just missed and it is not the environment to chase the market averages. I recommended several financial sector ETFs and will continue to look for new opportunities in stocks that are close to good support and show positive volume and relative performance analysis.
I was in error last time as the Vanguard Total World Stock Index (VT) dropped below the initial level at $62.15 on Tuesday, September 9. So the initial buy of the dollar cost averaging program should have started on September 10.
To complete the program you should make four more equal dollar investments every two weeks with the next coming Wednesday, September 24. This will have you completely invested by early November and well positioned for the stock market's strongest months.
Don't forget to read Tom's latest Trading Lesson, Finding the Sweet Spot in the Financial Sector.
