By Tom Aspray, MoneyShow.com
It was another rough week for the stock market, as Thursday’s rebound was quickly erased on Friday. This has left many investors shellshocked, while traders are either quite happy or quite frustrated. The close below 12,000 in the Dow will not set a good tone for the upcoming week.
The initial support levels I discussed last week have all been violated, with the next key support levels for the Spyder Trust (SPY) at $125.28—about 2% below Friday’s close. The SPY has declined about 6.8% from the early May highs, a deeper correction than I was expecting.
Of course, economic news has fueled the market’s decline, as both investors and consumers are doubting the health of the economic recovery.
Ben Bernanke’s comments last week did not help—some were hoping for news on QE3. Clearly, sentiment is getting more negative, which makes July’s second-quarter earnings results even more important.
Investors with a short-term focus are likely wondering whether they can afford a vacation this summer. If tourism falls this year and consumers stop spending, it will likely cause a further slowdown in the economy.
But investors should not give up. As I discuss in more detail below, the intermediate-term analysis remains positive for the stock market. It continues to suggest that the current correction will set up a good buying opportunity.
More importantly, I recommend those who have a 401(k) stick with their commitment to stocks like I am.
Sentiment measures like the AAII sentiment continue to reach extremes, as 48% are now bearish and only 24% are bullish. These figures are close to levels last seen in August 2010.
Still, the technical damage that has occurred over the past two weeks suggests that once stocks stop falling, choppy sideways action is likely before a bottom can be completed.
The stock markets had little in the way of fundamental news to deal with last week, but this week is totally different. We start on Tuesday with producer-prices and retail-sales reports.
On Wednesday, there's more news on inflation with the Consumer Price Index, along with industrial production. Housing starts, jobless claims, and the Philadelphia Fed Survey follow on Thursday.
The week ends with a bang, as we get consumer sentiment and leading indicators, which should give us a new reading on the economy. It is also quadruple witching, when futures and options expire, and this generally causes a pickup in volatility.
Things seemed to quiet down over Greece until Friday, when new tensions emerged. This added further pressure on the Euro, and helped the dollar continue higher.
The OPEC meeting was also a surprise, as they failed to agree on officially raising crude-production levels. Still, Saudi Arabia and others are likely to increase production, ignoring Iran’s wishes. This may eventually soften crude oil prices, which remain locked in a trading range.
The improvement in the dollar, discussed below, is likely to add some pressure on commodity markets despite the strong fundamentals.
The USDA crop report was very bullish for corn, which moved to new all-time highs. This will not help the inflationary pressure—and the commodity markets may be close to bottoming. Both and silver are still locked in trading ranges, as they did not get much of a lift from the sell-off in stocks.
WHAT TO WATCH
Many will be surprised to discover that a number of industrial groups have performed quite well since the market bottomed on March 16, after plunging in response to the tsunami and nuclear meltdown in Japan.
The S&P Fertilizer and Chemical Index, as I discussed
on Friday, is up 7.5% from the March 16 close, while the S&P 500 is up just 1.3%. Since mid-May, the results are even more dramatic—up 11.1%, versus a 2.9% decline for the S&P 500.
I look for these industry groups using relative performance analysis, which compares the performance of an industry group or stock to a major average like the S&P 500, and is available on many Web sites.
Two industry groups, the DJ Residential REIT Index and the DJ Restaurants & Bars Index, have both outperformed the S&P 500 since the March 16 close, up 10.8% and 5.9% respectively. Typically, the groups that perform the best during a weak market will be the strongest once stocks turn around.
The long term chart of the Spyder Trust (SPY) shows the March lows of $125.28, along with the strongly rising 200-day moving average. The major uptrend (line a) is now at $125.10.
The S&P Advance/Decline (A/D) line has broken its uptrend from last summer’s lows (line b), but is still well above the longer-term uptrend (line c). The current analysis of the 200-day MA on the SPY and the A/D line continue to signal a positive intermediate-term trend.
Resistance for SPY is now at $130 and $132.50.
The daily chart of the Diamonds Trust (DIA) shows that it also has broken its uptrend (line d) with the longer-term uptrend (line e) in the $117.50 area.
The 38.2% support stands at $116.04 with the March lows at $115.51.
The Dow Industrials A/D line also shows a very strong uptrend (line g), which is positive. The A/D line has major support at the April 2010 and November 2010 highs (line f).
Resistance for DIA is now at $122.80, and then in the $125 area.
The PowerShares QQQ Trust (QQQ) has next key support at $53.77, which corresponds to the March lows. There is first resistance now at $56.50, and then at $57.45.
The iShares Russell 2000 Trust (IWM) closed Friday just above the support at $77.57, with the 2011 low next at $76.95. Strong resistance is now at $80 to $82.
All of the major sectors have come under pressure, but the Select Sector SPDR - Consumer Staples (XLP), the Select Sector SPDR - Health Care (XLV), and the Select Sector SPDR - Utilities (XLU) have not yet reached major support. These sectors are all defensive, and are likely to perform the best when the market turns around.
The Select Sector SPDR - Financial (XLF) has led the market on the downside, as it has been underperforming since early in the year. The failure to stop to the new debit-card rules and Friday's announcement that the Fed will expand capital tests to more banks also kept the sector on edge.
The next support for XLF sits at $14.30 (line a) and then considerably lower at $13.30 (line b). The weekly OBV is plunging, and while solidly negative, is now quite oversold.
The Select Sector SPDR—Energy (XLE) is also an important sector to watch. If it were to weaken more and break the important support at $72, it could drop to the $69.40 area and its 40-week MA. This would be another negative for the overall market.
The action in crude was quite choppy last week, but after the May plunge that was not surprising. August crude rallied from a low last Tuesday of $98.35 to almost $103, before closing the week back below $100.
This is a seasonally weak time for crude oil, but it would take a decisive break of support at $96 to $96.75 on August crude to trigger a decline to the $92 area.
Despite the negative sentiment on the US economy, the PowerShares DB US Dollar Index Bullish Fund (UUP) and the dollar index held well above the prior lows last week and closed strong.
The chart of UUP shows higher lows (line d), as the support in the $21 area held. UUP needs to move above the resistance at $21.86 (line c) to signal a further rally. Volume declined last week into the lows, but the OBV is still not that positive.
The SPDR Gold Trust (GLD) came under pressure late in the week, despite the decline in the stock market. The rally appears to have failed below the resistance at $152.
A break below the support at $148.60 is likely to signal a decline to the $145 area.
The iShares Silver Trust (SLV) is still locked in a trading range, with resistance at $37.70 and support at $34.60.
I would not be surprised to see a break of this support and a decline back to between $31 and $32, especially if the dollar strengthens further.
Yields on ten-year Treasury notes stabilized below 3% last week, and the big news in the bond market was the sell-off in the high-yield bond market.
Some of the ETFs in this area are back to the lower boundaries of their recent trading ranges. There are no major sell signals yet, but this sector of the bond market will bear close watching.
The Week Ahead
Last week’s developments may signal a shift, as—despite the dire outlook for the US economy—there was a move into the dollar. One sign that a decent rebound in the stock market is finally underway would be a market that moves higher on worse than expected economic news.
Technically, a SPY rebound back to the $130 area is extremely likely in the next few weeks, and I would certainly not recommend that one sell at these current levels unless a previously determined stop was hit.
I would continue to watch some of the industry groups, like those discussed above, which are outperforming the major averages. Once the stock market bottoms, these should be the best sectors for new buying.