by Tom Aspray
June so far has been a tough month for stocks. The S&P is down around 2.5%, although it was able to close the week above the lows.
Since 1950, the S&P 500 has been down slightly in June, including a 5.2% loss in 2010 and an 8.55% slide in 2008. Over the past ten years, the best was 2012′s gain of 3.99%.
So what about July? Here, the record is a bit better, as the S&P was up 34 years and down 29, with an average gain since 1950 of 0.8%. Since 2003, the best year was 2009, when we saw a 7.24% gain; 2004 was the worst, as the S&P lost 3.28%.
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The seasonal trend (using data since 1930) shows that from the late June lows, the minor trend (line a), is generally upward until September, which is statistically the worst month of the year. Stocks generally peak in the middle of September-remember the high of September 14, 2012?
At this point, the technical studies show no signs yet of bottoming out, as the strength early last week was short-lived. As I noted in last Friday’s column Did You Summer-Proof Your Portfolio?, the daily technical studies are still in correction mode, while the longer-term patterns suggest that this current market decline will provide a good buying opportunity.
The turmoil in the markets was in reaction to the prospect of higher rates, exacerbated by the confirmation that the Fed would cut back their bond buying if the economy continued to improve. I assumed this would be the case last week, but the market obviously took the news quite hard.
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The weekly bottom in long-term rates was confirmed at the end of May, when the yield on the 30-year T-Bond completed its reverse head-and-shoulders bottom formation. The chart shows that yields moved above the neckline (line a), which projects a move to the 4% level.
A similar formation in the ten-year T-Note yields was confirmed last week. Both yields are at or above the weekly Starc+ bands, indicating the yields have likely risen too fast. This makes a pullback in yields and a rally in bond prices more likely in the coming weeks. Bondholders should have a nice opportunity to reduce their exposure and shorten their maturities.
One should keep in mind that rates need to still move significantly higher to confirm that the long-term bull market in bonds is really over.
The selling in the Japanese market has been even heavier, but it is my view that the yen will continue to weaken, and by comparison that the country’s stock market will move higher over the rest of the year.
Therefore, the correct correction should be viewed as a buying opportunity.
The comparison chart shows that the Nikkei-225 is still the leader for the year, up over 23%:
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The SPY is now up just under 11%, while the German Dax is back to unchanged for the year after it also had a rough week. If our economy is going to get even better, as the Fed expects, then it should eventually lead to a turnaround in many of the emerging markets.
The Vanguard FTSE Emerging Markets ETF (VWO) is down about 16% for the year, but this is one area I am keeping a close eye on, as it could bottom out before the other world markets complete their corrections.
On the economic front, last week’s data was pretty good. The Empire State Manufacturing Survey beat expectations, as did the Housing Market Index, which moved above the 50 level for the first time since 2006. I took a look at this index recently in A Technical Look at Fundamentals, as it technically confirmed a bottom for the housing market over a year ago.
Housing starts and existing home sales were also strong, but the homebuilders were hit hard in last week’s sell-off. This is consistent with a further correction this summer that should present another good buying opportunity.
This week, we have another full slate of economic data, with the Dallas Fed Manufacturing Survey on Monday, followed Tuesday by durable goods, the S&P Case-Shiller Housing Price Index, and new home sales.
On Wednesday, we get the final revision on first-quarter GDP, and then Thursday we’ll see the next report on jobless claims, which was a disappointment this past week. Also on Thursday, personal income and outlays data is released, along with pending home sales. The week ends with the Chicago PMI report and June’s final reading of the University of Michigan Consumer Sentiment Survey.
What to Watch
The rally early last week gave some of us some hope, myself included. Unfortunately, I tightened my stop on the ProShares Ultrashort S&P 500 ETF (SDS), and was stopped out before it rallied.
The market is already getting pretty oversold, as the number of NYSE stocks above their 50-day MAs dropped from 54 last week to around 35 this week. At last November’s lows, it was under 25, and in June 2012 was close to 12. Therefore, it can decline further.
Though the latest sentiment readings were taken before last Thursday’s plunge, both individual investors and financial newsletter writers were more bullish last week. According to AAII, the bullish percentage rose to 37.4% from 33%, well above the April lows, when a light survey reflected only 19% bulls.
The number of bullish financial newsletter writers rose to 46.8%, from 43.8% the previous week. Only 21.8% are bearish, so more fear is needed to move both readings to levels characteristic with a market low.
I went through the daily technical outlook before Friday’s opening. While stock prices moved in and out of positive territory on Friday, before closing mixed, the daily technical studies showed little change.
The sell signals from the daily studies were reaffirmed last week, and the weekly studies are also now declining. Technical analysis allows for a further decline, but the majority did not form any significant divergences at the recent highs.
Even more important, the weekly and daily NYSE Advance/Decline lines confirmed the recent highs, which is positive for the major trend. Those who have been following me for some time will recall the September 2010, October 2011, June 2012, and December 2012 lows, when the outlook for stocks was quite pessimistic. A/D line analysis said you should be buying, not selling.
The number of new stock lows hit 385 on June 12, but only 356 on Thursday. This divergence could be significant, but it is too early to tell .The number of stocks making higher highs has dropped to just 23.
The weekly chart of the NYSE Composite shows that the weekly Starc+ band was tested just five weeks ago. However, this week’s close was not far above the Starc- band at 8,858. The support that connects the highs in 2012 (line b) is now at 8,818.
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To determine levels of support, I found it helpful to look at the short-, intermediate-, and long-term Fibonacci retracement levels. These levels will often overlap, which makes those levels more important.
In Friday’s article, I looked at what I call the minor Fibonacci support levels that are calculated from the June 2012 lows. For the NYSE, this 38.2% retracement support is at 8,757. But if you use the 2011 lows, the 38.2% support waits at 8,440. This coincides with the longer-term uptrend (line c), and is about 6% below current levels.
The weekly NYSE Advance/Decline line confirmed the late May highs in the NYSE Composite, and is still holding above its WMA. It has further support (line d). It could still break this uptrend, but I would expect it to hold the highs from 2012.
The flat 20-week EMA is now at 9,114, with further resistance at 9,217 and then 9,400.
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S&P 500
The weekly chart of the Spyder Trust (SPY) shows that it also tested the Starc+ band in May, as well as trend line resistance (line a) before the recent decline. For this week, the Starc- band should be in the $155 area, as SPY closed just above the flattening 20-week EMA at $158.50.
The weekly OBV did confirm the highs, and tried to hold its WMA, but failed below it last week. It is still well above the uptrend (line b). We could see similar corrective formations that occurred in the spring and fall of 2012 (see circles).
There is initial weekly resistance at $163.20, and then at last week’s high of $165.99.
Dow Industrials
The SPDR Diamond Trust (DIA) was able to close above its flat 20-day EMA at $146.35, with the weekly Starc- band at $144.50. The chart support (line d) that connects the 2012 highs sits at $141.50, which is about 4% below current levels.
The weekly chart triggered a low close doji (LCD) one week after the highs.
The daily Dow Industrials A/D line (not shown) is holding above its uptrend from the early 2013 lows, and is acting stronger than prices. The relative performance broke its downtrend (line e), but has made little upward progress, as it is flat and below its WMA.
The weekly OBV has dropped back below its WMA, and has important support now (line f). Weekly chart resistance now stands at $149.80, and then in the $152 to $153.30 area.
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Nasdaq-100 The PowerShares QQQ Trust (QQQ) dropped below the monthly pivot support at $70.68 last week, and is retesting the breakout level (line a). The minor 38.2% Fibonacci support level sits at $69.72, with the weekly uptrend now at $68.80.
The RS line has dropped back below its WMA, and needs to move above the recent high to complete the bottom formation. The weekly OBV had been lagging the price action, and has now dropped below its WMA. Support for the OBV can be found at line c.
There is initial weekly resistance at $71.40, and then further levels at $73.80.
Russell 2000
The iShares Russell 2000 Index (IWM) was the strongest early last week, but was hit with heavy selling later on. It is still holding well above the flat 20-week EMA at $93.90. There is more important support at $91 (line d), which was the major breakout level.
The relative performance broke out slightly to the upside last week, as it overcame the downtrend (line e). It is holding well above its flat WMA. The OBV looks weaker, as it dropped below its WMA and the uptrend (line f) last week.
The monthly pivot at $96.85 represents first resistance, with further levels now at $98.70 to $99.80.
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