I believe that it is important to point out to all my readers, especially those who are not already members of S.O.M.E. (as members are already well-aware of my trading strategy!), that the more volatile the market becomes, whether it trades up or down, is more beneficial to us, as the returns on our options increase dramatically, as observed throughout June and July, so far.
I must say I am a great supporter of the bulls, but will play-along with the bears to extract as much value from our options plays, as possible. I am a great believer in things moving forward and improving as time progresses but I also know that we have to play-the-game to extend our profits. The only catch in this type of market is “knowing” or realizing in which direction it will take, and it seems that we have been able to fulfill this decision in most cases, to gain our profitability.
Key Events This Week
Note:-All earnings dates listed below are tentative and subject to change.
This Week’s Economic Reports
There are still quite a few major economic indicators available this week, which are:-
This Week’s Major Earnings Reports
• The market is closed for the Labor Day holiday on Monday.
Outlook for This Week
U.S. stocks could start this week with investors feeling a bit more optimistic about the economy, thanks to a stronger-than-expected jobs report, making further market gains more likely.
The government's nonfarm payrolls report on Friday was the latest of the week's data to suggest the economy may not be headed for another severe downturn, as many investors have feared.
All three major U.S. stock indexes rallied more than 1 percent on Friday. The Standard & Poor's 500 Index .SPX scored a gain of 3.8 percent for the week, marking its best week in eight, and starting September -- typically the weakest month for the market -- on a strong note. In contrast, for the month of August, the S&P 500 fell 4.7 percent.
"The data forces a re-evaluation of the underlying thesis of the economy, and how the stock market is priced," said Charles Lieberman, chief investment officer of Advisors Capital Management, LLC in Hasbrouck Heights, New Jersey.
"The employment report is really the keystone. If the economy is producing jobs, the thesis of a decline in the economy goes out the window," he said.
This week, the economic calendar will be light, especially since it will be a holiday-shortened week with the U.S. stock market closed for Labor Day on Monday. But the agenda will include the international trade deficit data, which investors will scrutinize for clues on spending, as well as the latest weekly jobless claims numbers.
Investors will also be anxiously awaiting word from President Obama this week as he fleshes out plans to rev up the stalled economy.
The president said Friday that he will announce some new proposals aimed at creating jobs, but he offered no details. Obama will speak Monday in Milwaukee, Wis. to mark Labor Day, traditionally the kickoff of the fall political campaign season. But the November congressional elections have been drawing attention for months, and the nation's high unemployment rate is likely to be the dominant issue in many races.
Obama also is scheduled to travel to Cleveland on Wednesday, and he will hold a White House press conference next Friday as he cranks up efforts to try and help revive the slowing economy.
Expectations for this Week
The Rollercoaster Ride within a Trading Range
Sentiment and the SPX
During the past couple of weeks, we highlighted the extreme negative sentiment on the market, with the implication being that whether one's negative bias was technically or fundamentally based, there seemed to be no shortage of sellers.
This left skeptical market participants vulnerable to a sharp, short-covering rally, which we witnessed last week. We saw continued stabilization around chart support at the 1,040 level on the S&P 500 Index (SPX) before an explosion to the upside.
Therefore, the short-covering possibility that was presented last week may have indeed been the scenario that played out from Tuesday's low into Friday's close.
So, where does last week's impressive advance leave the SPX heading into the holiday-shortened week? In the simplest terms, the SPX is in the upper zone of a one-year trading range, which would suggest from purely a chart perspective that short-term risk outweighs reward.
Per the chart below, since mid-September 2009, the SPX has mostly been locked in a range between 1,040 and 1,130. There have been brief periods in which it closed above and below this range, including a long period above its upper boundary in March through early May. But, for the most part, it has been all about 1,040 and 1,130. In fact, of the 248 trading days since Sept. 14, 2009, the SPX closed between 1,040 and 1,130 on 178 of those days, or 72% of the time.
Are we in for the same pattern that has been in place for the past several months, in which the SPX moves from the top to the bottom of its range, and from the bottom to the top of its range, in lightning speed? It certainly appears rallies in this period have been induced by short-covering, as they have been sharp and swift. But at the same time, in the absence of natural buyers to sustain such advances, rallies have been viewed as "selling opportunities" among equity fund managers, who are dealing with investor withdrawals on a consistent basis.
Hedge Funds and the CBOE Market Volatility Index (VIX) In addition, hedge funds, who bid the market higher from its trough in March 2009, have clearly become disinterested in equities at these levels, having opted for the safety of Treasury bonds.
Moreover, it appears hedge fund managers have viewed market rallies as an opportunity to buy cheap portfolio protection for long positions. A decline in the CBOE Market Volatility Index (VIX – 21.31), an approximate measure of the cost of portfolio protection, usually accompanies market advances, and the VIX retreated almost 13% last week. The collective action to purchase portfolio insurance via index puts, in the absence of simultaneous accumulation of long positions, usually has a negative coincidental impact on the market, as sellers of the puts short futures to hedge.
Above being said, the VIX closed below its 200-day moving average for the first time since Aug. 10. A declining VIX is usually associated with bullish price action, and the close below the 200-day moving average is certainly encouraging for long-term market bulls. At the same time, a short-term risk for long equity players is that the VIX rallied sharply on market weakness the last time that it was trading at these levels in early August.
Beyond 1,130 on the SPX, we are also keeping a keen eye on the 1,115 area, site of the converging 160-day and 200-day moving averages. Should a breakout above 1,130 occur, a bullish inverse "head and shoulders" pattern would be in place. We continue to believe that this technical pattern offers more upside reward than the downside risk of the various "bearish" technical patterns that have been discussed in the financial media recently.
Seasonality of September
Finally, while everyone warns of the dangers of September from a seasonality perspective, keep in mind that four of the past five Septembers have been positive for the market. We are off to a good start this September, mindful too that there are a lot of trading days left in the month.
From a short-term perspective, we are open to a continuation of the year-long pattern of swift moves to the top and bottom of the range, as both bulls and bears can make their case. Actions one might take would include keeping your long exposure and taking some profits, or hedging via the purchase of puts to protect long positions. Moreover, last week's pullback in the bond market could provide an attractive, low-risk entry for those of you seeking to buy pullbacks on underlying assets in a longer-term uptrend.
When markets reopen on Tuesday, investors face few earnings reports of importance and only two economic reports with real substance. That alone may let stocks move higher.
The Federal Reserve will release its Beige Book report on the economy on Wednesday. The report is a narrative look at what's going on in the economy, based on reports gathered by the staffs of the 12 Federal Reserve banks. What investors want to see is what the report says about trends in hiring, real estate, manufacturing and retailing.
The president said Friday he'll be offering new proposals this coming week to help boost the economy. One will almost certainly be to make the research and development credit permanent along with other tax breaks for small business. Wall Street really wants the administration to offer something dramatic and smart. And it wants clarification on where the administration stands on extending the Bush tax cuts. Right now, the Street is expecting the cuts to be extended.
Will jobless claims, which will be reported on Thursday, show more improvement? Maybe. If the Institute for Supply Management's report on manufacturing is right, the answer is probably. If the ISM's non-manufacturing index, which came out Friday, is right, maybe not. Still, new jobless claims fell for a second straight week to a seasonally adjusted 472,000 in the week ended Aug. 28 from 478,000 in the week of Aug. 21 and 504,000 in the week of Aug. 14. The number of workers still getting jobless benefits has dropped for four straight weeks.
U.S. government data next week is expected to show the international trade deficit narrowed somewhat to $47.2 billion in July, according to economists polled by Reuters, after rising to $49.9 billion in June, the highest since October 2008. Analysts believe sluggish domestic demand should cause a moderation in the growth of imports in coming months, while they expect U.S. exports to strengthen. As a result, the trade gap should be less of a drag on the economy.
Wholesale Inventories for July
Wholesale inventories for July, due on Friday, are forecast to rise 0.4 percent, the Reuters poll showed, following June's gain of just 0.1 percent. That report also will shed light on wholesale sales, seen up 0.3 percent in July, following June's decline of 0.7 percent. (Wall St Week Ahead runs every Friday.
• The Financial Crisis Inquiry Commission, which is tasked with investigating the causes and fallout from the credit-market collapse, will hold public meetings Tuesday in Bakersfield, Calif., and Wednesday in Las Vegas. The panel plans to hear testimony from local residents about the causes and effects of the financial crisis in their communities.
• Securities and Exchange Commission Chairwoman Mary Schapiro will speak at an Economic Club of New York luncheon Tuesday. The SEC is facing a mammoth workload in the wake of the financial crisis. It has been given the task of more studies and rules from the sprawling Dodd-Frank financial bill than any other federal agency. Meanwhile, it is racing to implement changes aimed at preventing another "flash crash." An SEC report on the causes of the May 6 crash is due this month.
• Euro-zone finance ministers are scheduled to approve the next EUR 9 billion ($11.57 billion) tranche of emergency financial aid to Greece at a special meeting Tuesday in Brussels.
Appearances by Federal Reserve Officials
• Fed Minneapolis President Narayana Kocherlakota speaks Wednesday in Missoula, Mont.
Conferences of Importance
Among the significant conferences this week are:-
• The Barclays Back-To-School Consumer Conference from Monday through Wednesday in Boston;
• Citi Global Technology Conference on Tuesday and Wednesday in New York;
• Keefe, Bruyette & Woods Inc. Insurance Conference on Tuesday and Wednesday in New York;
• Jefferies & Co. Global Shipping & Logistics Conference on Wednesday in New York; and
• Credit Suisse Auto & Transportation Conference on Wednesday and Thursday in New York.
This Week’s Earnings Expectations
Earnings reports are so light that only one involves a component of the Standard & Poor's 500 Index (SPX). That'sNational Semiconductor (NSM), which will report after Thursday's close.
The company, whose chips are mostly used in power-management systems, is expected to report 35 cents a share in earnings on revenue of $415.1 million. That would be an increase of 169% on earnings on a revenue gain of 32%.
More retailers and apparel companies will report quarterly results in the coming week, and while many are expected to report higher sales, concerns remain about a cautious consumer sentiment in the second half of the year.
Apparel company Phillips-Van Heusen Corp. (PVH) will report Tuesday, while auto-parts retailer Pep Boys-Manny Moe & Jack (PBY) and women's apparel retailer Talbots Inc. (TLB) report a day later. All three are expected to post higher revenue from a year ago, according to analysts polled by Thomson Reuters, with Phillips-Van Heusen to greatly benefit from its $3 billion acquisition of Tommy Hilfiger.
Other Company News
Mergers and Acquisitions
This is the stealth trend that's started to affect markets.
Companies with plenty of cash on hand are looking to buy other companies to protect themselves in a soft economy or get ready for the recovery.
The latter is why Hewlett-Packard (HPQ) was so intent on buying 3Par (PAR), the maker of computer storage that can be used in cloud computing. That's where companies offer storage and the capacity to manage software for customers.
Hewlett wants to be a player in the business. So do IBM (IBM), Microsoft (MSFT), Salesforce.com (CRM) and others. But deal making is coming to regional banks, airlines, gold mining companies and others. And it's not just mergers and acquisitions.
There's an initial public offering coming in November: General Motors.
INDICATORS AND MARKET CONDITIONS
Labor Day Week
August is over, which may be a relief to market participants: the S&P 500 fell 4.74% during the month. That was the worst August since 2001. This week I'm looking at the seasonal patterns of the short Labor Day trading week and for the entire month of September.
Below is a summary of how the week of Labor Day played out for the market over the last 20 years, compared to all weeks. The top table summarizes the week of Labor Day, and the second table summarizes any time since 1990. The last column shows the data for the entire week. We see the short holiday week has been slightly bearish, but nothing to be too worried about.
When we focus on the individual days, we see the middle of Labor Day week to be the main reason for the week's underperformance. Wednesday is the only day that has been negative more often than positive. Both Wednesday and Thursday average a negative return. The beginning and end of Labor Day week have typically outperformed the market.
Below is a chart showing the S&P 500 performance over the last five Labor Day weeks. Last year was a good year, finishing 2.59% higher. One year prior to that, in 2008, the market tumbled 3.16%.
September: The tables below show monthly data for the S&P 500. The numbers to the left of each table show the rank of that month's average return. Over the last 20 years, September has indeed been the worst month for the market, averaging a loss of 0.76%. However, over the last five years, September has held its own, averaging a gain of 0.24%. Also, it has been positive in four of the last five Septembers (actually five of the last six).
Labor Day week has a negative tendency over the last 20 years, and so does September. However, given all the articles I read highlighting September's woes, I'm a bit optimistic. If investors are as afraid of September as the articles imply, then they have probably held off on some buying and have money on the sidelines that they are waiting to deploy. This could be a positive boost for the market. Maybe the fear of September is the reason five of the last six has been positive.
***Further evidence of market conditions can be seen in representations of charts below.
Tracking of SPY, DIA, IWM and QQQQ
The markets staged an impressive rally the past few days after threatening to continue their recent slide earlier in the week. The general indexes were looking vulnerable by late Tuesday as they headed for a retest of the previous week's lows, but a sharp gap higher on Wednesday caught bears flat footed and ended up leading to a three-day surge. The markets ended the week sharply higher and cemented the recent lows as support. They remain in a trading range, and could be on their way for a retest of the July highs.
The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, respected the $104 level as support, making this a critical level to watch. The significance of this level is that it held above the July lows, showing that investors were willing to pay higher prices than they were a couple of months ago. This could be an important higher intermediate low, and would be confirmed with a break above resistance near the $113 level.
Despite the show of strength by the bulls, SPY likely still needs time before mounting a serious assault to clear the $113 level. The markets are already extended in the near term, and are pressing into gap resistance near $112.
The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, also respected a support level earlier this week and ended up surging from those lows. The $100 level has become a clear level to watch, as bulls have aggressively defended this area on a few occasions. Looking above, DIA is testing an important level near $105, which is the lower end of a bearish gap from August that acted as stiff resistance a couple of weeks ago. A close above this level could lead to a test of the more important level of $107.
The Powershares QQQ ETF (Nasdaq:QQQQ) was in serious danger earlier this week as it started to drop from the $44 level, but the Qs came roaring back by the end of the week and closed above their 200-day moving average. As the stock pierces the $44 level, the new lows near $43 should be the focus on any weakness in the coming days. The sharp rebound from this level may have trapped some bears and it should act as support moving forward. If QQQQ breaks beneath this level, it may result in a full-fledged test of the low $40s as support.
We mentioned last week that the Russell 2000, as represented by the iShares Russell 2000 Index (NYSE:IWM), had been showing some relative strength and that it could be a valuable clue as to the next move in the markets. One of the potential catalysts for the strong move during the past week was an increase in jobs in the private sector and this could be hinting at an improving picture for the small cap sector. The small caps remain a key component to watch and the $59 level is the clear area to watch on the downside. Overall, IWM remains in a much larger trading range, and it could take some time before it is ready to clear either side.
Last week’s price action was very constructive as it showed aggressive buying near support levels. While this doesn’t guarantee a bottom is in, it is the first step in a possible bottoming process. The markets have quickly gotten ahead of themselves, and while they may ride the current momentum a little higher, the more likely scenario is a retracement of at least a portion of the week's rally. The markets are still within a much broader trading range, and it is still too early to know if this is a larger topping process or if a new base is being formed. The levels to watch are pretty clear with last week’s bounce clearly showing where support is, and the July highs marking resistance. With summer practically over, the next few weeks should usher in an increase in volume and provide more clues as to the next move in the markets. Either way, it is sure looking like there could be a strong move in autumn.
8 Transport Stocks Gaining Momentum
One of the most commonly used tools in active trading is known as the moving average convergence divergence (MACD) indicator. Although the name of this indicator seems intimidating, it is actually quite simple to use and it can often generate profitable trading ideas.
As you can see from the chart below, the indicator consists of two parts: the MACD line and the signal line. The MACD line is simply the difference between two exponential moving averages, typically the 12-day and 26-day averages. The reason that traders pay attention to varying lengths of moving averages is because they want to figure out how the short-term momentum is changing relative to the longer-term momentum. If the short-term average rises faster than the long-term average, the MACD moves upward. Traders use this to suggests that the buying pressure is increasing.
The signal line, shown as the dotted blue line on the chart, is also known as a trigger line and is created by taking a nine-period moving average of the MACD line. The signal line is plotted alongside the MACD line and is used to predict changes in a stock's direction.
The most common buy sign is triggered when the MACD line crosses above the signal line (illustrated by the right arrow in the chart above). A MACD cross above the signal line tends to predict that the bulls are gaining control of the direction and it generally leads to a short-term move higher. Interestingly, traders have been spotting bullish MACD crossovers on the charts of many transportation stocks. The bullish movement in the transport stocks could be used by active traders to suggest that the economic recovery is on track and could be stronger than many of the pundits have been suggesting.
In the table below you will find a list of eight transport stocks that have recently experienced a MACD buy sign:
Click on transport stock to see graphs in relation to the stocks mentioned above.
It is interesting from a technical perspective to see strong relative strength in the area of the transport sector. The bullish MACD crossovers occurring on the charts of the above companies could suggest that the economic recovery is stronger than many traders may think it is. It is also important to note that the short-term nature of the MACD indicator can often lead to being whipsawed in and out of a position several times before being able to capture a strong price movement so be sure to use this tool in conjunction with other technical/fundamental indicators to ensure a more accurate idea about a stock or sectors direction.
High unemployment and weak consumer spending have been among the toughest hurdles to sustaining the economy's recovery from the worst downturn since the 1930s.
Though the stock market ended this week with gains, the S&P 500 was unable to break out of a trading range of between 1,040 and 1,130, and some analysts see that range-bound trend continuing.
"I think we're in rally mode. In no way do I see us going through new highs or breaking through the trading range, but I see strength after the holiday," said Alan Lancz, president of Alan B. Lancz & Associates Inc. in Toledo, Ohio.
"We still see this as a two-steps-forward, one-step-back type market ... but we'll take what we can get."
That's a promising start, but history shows that this month isn't one that Wall Street's denizens will "Try to Remember," a la the iconic song from "The Fantasticks" of Off-Broadway fame.
September is typically the weakest month for stock market performance, according to the Stock Trader's Almanac. The S&P 500 has declined 0.7 percent on average during September in the years since 1950, the Almanac says.
However, on the day after Labor Day, the Dow has risen in 12 of the last 15 times, the Almanac notes.
Friday's jobs report was the catalyst for a bullish end to the week for stocks because it showed that although overall payrolls shed jobs for the month of August, the decline was much less than expected. And providing a bright spot, private payrolls rose more than expected. a ray of hope for the recovery. Other data last week showed an unexpected rise in the Institute for Supply Management index on U.S. manufacturing, stronger-than-expected pending homes sales in July, and a second consecutive week of lower claims for initial jobless benefits.
The data means "we are probably not looking at a double dip," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.
The week ahead really does not have many economic reports, which is typical of the second week of most months.
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