by Tom Aspray
The world markets had the widest ranges last week that we have seen in quite a while. An increase in volatility is often seen prior to a more extended correction. It was a plus that the major averages, especially the stock index futures, closed last week above the prior week’s lows.
Many of the averages did form daily key reversals on Wednesday, but they have short-term significance when not accompanied by other technical negatives. As I discussed a few weeks ago, a sharply lower weekly close is often the first sign that a top is being formed.
The German Dax closed the week down just over 1%, even though the country’s latest reading on business confidence was the best in several months. And though many of the US averages closed the week over 1% lower, the recent highs were confirmed by both the weekly and daily technical studies. This suggests that at worst, we are in the early phases of the top-building process.
The market’s problems started Wednesday, as the comparison of Ben Bernanke’s comments with the FOMC minutes that had just been released spooked investors. The concern that Fed’s bond-buying program might end earlier was the reason to sell.
The competition to outdo one another on the various financial networks is fierce, but I would recommend that investors not pay attention to these Fed whisperers. Keeping an eye on what the weekly and monthly market data will be much more illuminating, as major trend changes show up on the technical side well ahead of the fundamentals. For instance, the homebuilders completed their major head-and-shoulders top formation in 2006, well before the housing market collapsed.
Click to Enlarge
Global rates moved higher last week, but interestingly, the increases were the most pronounced in the bonds of the strongest countries, the US and Germany. The uptrends in the yields of the German ten-year Bunds and the US ten-year T-Notes (line a) shows a sharp increase since the start of May.
In contrast, the yields on the Italian ten-year bond have just risen slightly (line b). Rates on Greece’s ten-year are still basically in a downtrend (line c), but have fallen from the extremely high yields of a year ago.
Also, a gradual increase in rates is not always a negative for the stock market. It could encourage some bondholders to shift from bonds to stocks.
On Monday, I will be releasing a special report discussing my outlook for US rates. The recent increase in both long- and short-term yields has brought them to levels where they are close to completing weekly bottom formations. One should keep in mind that it would take much higher yields to reverse the major downtrend.
Over the past few weeks, in columns like Put the Odds in Your Favor Now, I have been advocating raising cash and taking profits. The percentage of cash in the Charts in Play Portfolio has increased significantly in the past two months.
The next few weeks are likely to be equally difficult as a fewer number of stocks will be able to go up significantly if the overall market does correct more sharply.
The Performance chart below shows that stocks have been the only game in town in 2013, as the SPY is up 15.6%, while bonds as represented by the iShares Barclays 20+ Year Treasury Bond (TLT) are down about 3.4%. Emerging markets, represented by Vanguard FTSE Emerging Markets ETF (VWO), have lost just over 4% so far this year.
Click to Enlarge
Of course, the Spyder Gold Trust (GLD) has been the real casualty, having lost over 17% so far this year. It is now retesting the lows from the middle of April. And silver has been getting even more press as prices have realty crashed.
Over the past two weeks, economic data has generally been quite good. The consumer sentiment data released on March 17 was much stronger than expected, as it jumped to 83.7, up from 76.4 the prior month.
Click to Enlarge
Last week, existing home sales and new home sales were both better than expected. Durable goods were also well above expectations. The data on manufacturing was also encouraging, as the flash PMI Manufacturing Index and the Kansas City Fed Manufacturing Index both reflected steady growth.
This week, we get a host of new data, which should help investors get a better reading on the economy. After the long weekend, we get the S&P Case-Shiller Housing Price Index and consumer confidence numbers on Tuesday. Also, we get more data on manufacturing from both the Richmond and Dallas Fed surveys.
The declining jobless claims have been a strong positive factor for the market, and we get the next reading on Thursday, along with the first revision of first-quarter GDP. Friday brings the personal income and outlays data, Chicago PMI, and the final monthly reading for May on consumer sentiment from the University of Michigan.
What to Watch
From May 14, prices accelerated to the upside until Wednesday’s reversal, which must have really punished some of the perennial bears who never thought the S&P 500 would get to even 1,600 or 1,625.
Friday’s close was mixed. The Dow finished up, while the S&P 500 and Nasdaq were down slightly. All were sharply lower in early trading, just like Thursday. The market’s resilience is impressive, and is a positive sign for next week’s trading.
They market’s outlook is still bullish, despite last week’s losses, and we still do not have firm sell signals from either the daily or weekly technical studies. On May 15, a total of 517 stocks made new highs on the NYSE, which is consistent with a positive major trend.
Though this was not mentioned in Thursday’s column, 3 Reasons to Avoid Panic Selling, it was another good reason to stick with your plan and the stops that you worked out before the reversal.
At Thursday’s low of 1,636, the S&P 500 was already 3% below Wednesday’s highs. I would not be surprised to see prices get back toward these highs in the next week or two, but given the nature of Wednesday’s reversal, they may not be exceeded.
Bullish sentiment of individual investors jumped again last week, according to AAII, as 49% are now bullish, up from 38.5% the previous week. Only 21% are bearish now, which is the lowest reading so far in 2013. This number will likely jump this week.
No comments:
Post a Comment