The markets would probably be much more bullish if not for the debt-ceiling debate in Washington, and in fact last week’s rally will need to last into an early-week debt deal or we could see a correction ahead, writes MoneyShow.com senior editor Tom Aspray.
The dual Euro and US debt crises have been dominating the market action for at least the past several weeks, but now the Eurozone countries appear to have taken definitive action.
With the agreement to work out Greece’s debt problem, it seems clear that the Eurozone leaders are committed to taking whatever steps are necessary to keep the contagion from spreading.
Most technical analysts, but few fundamental analysts, realize the important role that psychology plays in the stock market. I think it is one of the more important factors in determining the market’s direction on a week-to-week or month-to-month basis. Fundamentals, I feel, are the key factor in the major trends.
The global debt fears have kept many out of the stock market since the May highs, and a failure to act on the debt ceiling could further depress the market. Conversely, I think raising the debt ceiling before the deadline would give the US and global stock markets quite a boost. The dollar index violated important support last week suggesting that some are not expecting the debt ceiling to be raised.
The earnings reports by technology giants Google (GOOG) and Apple (AAPL) clearly have raised the hopes for a further economic recovery. Without the debt crisis deadline looming over the market, stocks would be much higher.
Technically, last week’s action suggests that the uptrend from the June lows has resumed, but further strength is needed this week. It will be important for the other major averages, including the S&P 500, Dow Industrials, and Nasdaq-100 to join the Dow Transports in making new highs.
As I discussed earlier in the week, it is the airline sector that has kept the Transports from going even higher. A rally failure at the May highs by the S&P 500 would certainly weaken the technical outlook.
The most encouraging development in this quarter’s earnings was from the banks, as several—including Wells Fargo (WFC) and JPMorgan Chase (JPM)— reported earnings that were much better than expected. WFC is up over 10% from last Monday’s low, while JPM is up over 8%.
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However, the financial sector is still badly lagging the S&P 500,and while my RS analysis of the sector has improved, it shows no confirmation of a bottom. The chart above tracks the percentage performance of the Select Sector SPDR Health Care (XLV), the Spyder Trust (SPY) and the Select Sector SPDR Financial (XLF) since the start of the year.
The XLV is up 11.9% so far this year, about double the 5.9% gain in the SPY. The XLF is now down 5.9% for the year, but just a week ago was down closer to 10%.
Looking at this in a different way, if you bought XLV at the start of the year instead of XLF, there would have been a 17% difference in performance.
This week we get the double whammy: more earnings reports, combined with a basket full of economic data. On Tuesday, we get the new-home sales figures, the S&P Case-Shiller Housing Price Index, and the latest readings on consumer confidence.
Wednesday will bring durable-goods orders, and later in the day, the Beige Book will be released. On Thursday, jobless claims and pending-home sales data follows, while Friday we get the initial advance readings on the second-quarter GDP.
WHAT TO WATCH
The stock market, after declining seven days from the highs (similar to April’s correction), rebounded impressively last week. The market internals were very impressive last Thursday. The A/D lines are all rising, but most are still significantly below the early-July highs.
Therefore, we need to see further strength this week to indicate that the major averages can move past the highs. If this occurs, it will of course be important that the A/D lines also make new highs.
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S&P 500
The key support level for the Spyder Trust (SPY) at $129.80 was broken intraday last Monday, but the SPY closed the day at $130.61.
The key support level for the Spyder Trust (SPY) at $129.80 was broken intraday last Monday, but the SPY closed the day at $130.61.
The sharp rallies last Tuesday and Thursday were impressive, with the next resistance at $135.36 to $135.70. Major resistance follows at $137.18 and the May highs.
The S&P 500 A/D line has turned up after holding its uptrend (line a) from the June lows. A break of this uptrend will indicate a drop back to the June lows. There is important A/D support at last Monday’s lows.
A daily close in the SPY below $132.42 would weaken the short-term uptrend.
Dow Industrials
The Diamonds Trust (DIA) did briefly drop below the 50% retracement support at $122.83 last Monday, before rallying sharply. It’s already close to the July highs at $127.37. It was hurt Friday by Caterpillar‘s (CAT) weak earnings.
The Diamonds Trust (DIA) did briefly drop below the 50% retracement support at $122.83 last Monday, before rallying sharply. It’s already close to the July highs at $127.37. It was hurt Friday by Caterpillar‘s (CAT) weak earnings.
There is further strong resistance at $127.67 to $128.63 (the May highs).
The Dow Industrials’ A/D line slightly violated its short-term trend (line b) last week, but is still holding well above the longer-term support (line c).
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