Bearish sentiment and economic troubles continue to take their toll on
the markets, but certain sectors look good and a buying opportunity may be right
around the corner, writes MoneyShow.com senior editor Tom
Aspray.
Even though global stock markets were able to stabilize on Friday, the sharp
declines last week added to the overwhelming negative sentiment in the
markets.
The technical formations prior to last week suggested that stocks were
vulnerable to decline, and the short-term outlook
turned more negative Tuesday.
Of course, the magnitude of the decline was a surprise to all, and Thursday’s
sell-off was similar to the panic selling that occurred in early August. This
gave the investment firms and major banks some vindication, as they have been
racing each other for weeks to cut their forecasts for the economy and lower
their year-end targets for the S&P 500.
Even the Federal Reserve joined in, as their new plan to lower long-term
rates was accompanied by the comment that there are “significant downside risks
to the economic outlook, including strains in global financial markets,”
something that undoubtedly spooked an already skittish market.
Though I think the Fed’s concern is valid, the general consensus of
economists makes me more skeptical. Many believe that if we are not already in
another recession, we will be soon. If this turns out to be the case, it would
be the first recession that was predicted by most as it was
occurring.
These predictions comprise the majority of market sentiment, even though last
week’s housing data was better than expected; existing home sales jumped 7.7% in
August. Nevertheless, a survey of 100 economists painted a bleak picture of
housing, as they expected prices to drop 2.5% this year, and then only rise 1.1%
through 2015.
In my experience in the market, the majority is rarely right. When you have a
consensus view—especially one that persists for some time—I always look at the
technical evidence to see whether it supports this consensus.
For example, my volume analysis on gold turned positive in 2006, but
sentiment toward gold was often mixed. In the fall of 2009, however, public
sentiment on gold was overwhelmingly positive, right before gold topped out on
December 1.
This began a months-long decline. The correction was severe enough to turn
enough of the bulls negative on gold, which created another good buying
opportunity.
Therefore, while the short-term outlook for the global equity markets is
decidedly negative (as I detail later), I think by year’s end the stock market
may surprise many of the current bears.
Click to Enlarge
Of course, the problems with the US economy and our leadership are just
magnified overseas. Many are suggesting that the Eurozone will eventually break
up, as their leaders fail to comprehend the severity of their debt problems.
The focus remains primarily on Greece, but the contagion fear is still
hurting the markets. The economic news last week was also grim, as the Eurozone
purchasing managers’ index dropped in September for the first time in two years.
Rating agencies downgraded many Italian and Greek banks, which did not help. (I
would love to see someone start rating the rating agencies.)
Late last week, the G-20 announced that it would take “all necessary action”
to shore up the banks and financial markets. I think they will eventually figure
out the necessary actions and move accordingly.
Unlike the US stock market, the German Dax Composite has continued to decline
after the sharp drop in late July. The Dax was sharply lower early last Friday,
but closed higher, and could have formed a very-short-term bottom.
Things weren’t that much better in Asia, as selling was heavy. News that
China’s factory activity declined in September reversed some of the positive
sentiment that had been building for their economy.
The Hong Kong Hang Seng Index had a rough week, down 7.9%, and as the chart
shows, the long term 50%
Fibonacci
support was broken. The 61.8% support stands at 16,544, which is 7.5% below
Friday’s close.
The market is likely to get a good test from the economic data this week. On
Tuesday, we get new-home sales figures, the S&P Case-Shiller Housing Price
Index, and the latest readings on consumer confidence.
Wednesday will bring the latest numbers on durable-goods orders, followed
Thursday by the final reading on second-quarter GDP, jobless claims, and pending
home sales.
On Friday, we get the numbers on personal income and consumer sentiment,
which is likely to be watched closely by Wall Street.
WHAT TO WATCH
The sharp drop last week pushed many of the market indicators to levels where
a sharp rebound is likely. The odds would have been even greater if stocks had
been sharply lower again on Friday.
Some charts show potential double bottom formations, and while the volume
action does support this view, the evidence is not strong enough to act. Given
the overhanging political and economic problems, a new trading range is more
likely.
I still think the current decline will be an opportunity to establish long
stock positions in some of the sectors that I like, but we need to see a
decrease in downside momentum first. Technology and cash-rich, high-dividend
stocks are my favorites, followed by the retail sector, as I do not think
Christmas shoppers will stay away.
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Enlarge
S&P 500
The
Spyder Trust (
SPY)
is holding above the August lows as it is testing the daily
Starc- bands. Last Thursday’s gap lower opening took out the
prior lows at $114.05.
If the August lows are broken, then the 127.2%
Fibonacci target from the
flag formation is at $106.50, while the width of the flag
gives downside targets in the $104 to $105 area.
First resistance stands at the gap in the $114.21 to $116.27 area, with
stronger levels at $118.50. The daily trend line resistance is at
$121.50.
.
The S&P 500 A/D line is so far holding above both the
recent lows and those that were made in August (line d). This is an encouraging
sign, but a move through the downtrend (line 3) is needed to confirm a
bottom.
Dow Industrials
The
Spyder Diamonds Trust (
DIA)
came very close to the 38.2% support of $105.46 last week, as DIA gapped though
the lower boundary of the flag formation (line f) on Thursday.
There is resistance now at $107.95 to $110.69, with a key level to follow at
$114 to $115.25.
The Dow Industrials A/D is diverging from prices (line h), but needs a move
through the resistance (line g) to confirm the divergence. A convincing break of
this support will indicate a further decline.
Click to
Enlarge
Nasdaq-100
The
PowerShares QQQ Trust (
QQQ)
also gapped lower Thursday, then closed back above the uptrend (line b) on
Friday, which is positive.
It would take a close below the September 6 lows at $51.91 to signal a test
of the August lows.
The Nasdaq-100 A/D line overcame its downtrend (line c) last week, which
suggests the A/D line could be bottoming. The A/D line shows a slight uptrend
(line d) which could be broken on a further decline. A move in the A/D line
above last week’s high would be positive.
There is resistance now at the gap in the $54.46 to $55.37 area.
In a
recent article, I took a close look at not only the
PowerShares QQQ Trust (
QQQ),
but also the
Select Sector SPDR Technology (
XLK),
Semiconductor HOLDRs Trust (
SMH),
and
Apple (
AAPL).
Sector Focus
All of the major sectors were hit hard last week, and three—energy,
materials, and industrials—look the weakest.
The
Select Sector SPDR Utilities (
XLU)
is holding first support in the $32.70 to $33 area, and a drop back to the $32
to $32.40 area should be a buying opportunity.
The
Select Sector SPDR Consumer Staples (
XLP)
and
Select Sector SPDR Health Care (
XLH)
are also holding well above their highs, but the short-term momentum is still
negative.
Oil
November crude plummeted as expected last week. The support at $85 and the
$83.20 level both gave way, with crude hitting a low of $77.55 on Friday.
This could be a final washout, but it will take some time for the market to
recover from a $13-plus drop.
There is initial resistance at $82, with stronger levels in the $84 to $85
area
