Week Ahead: Technical Signals to Provide Direction!
Wall Street: Is the Stock Market a Head Fake Rally?!
by Ian Harvey
August 20, 2012
In the absence of data or policy catalysts and with the S&P 500 near four-year highs, market participants are hoping technical indicators hold the clues on whether stocks will sell off into September following a slow-speed rally.
The few people left on Wall Street in the week ahead will likely debate whether the stock market is on a course to new highs, or just in the final stages of a head fake rally that will end in pain when September rolls around.
The S&P 500 is a scant 0.06 percent away from closing at highs last seen in the pre-crisis days of June 2008, even as an unimpressive earnings season draws to a close. The looming U.S. presidential election adds to the uncertainty, and inconclusive economic data makes any bet on further economic stimulus from the Federal Reserve a risky gamble.
During the summer doldrums, stocks have continued to move steadily higher, befuddling traders and analysts, who still see Europe lurking in the background as they worry about the U.S. economy, the election and the “fiscal cliff.”
The S&P 500 held near a four-year high on Friday, and the market's key gauge of anxiety sank to its lowest since 2007, suggesting a belief that the problems stressing investors might be closer to a resolution.
Also, Apple tops $648 and is up 60% on the year. The Dow, up 25, sees its sixth straight weekly gain.
Facebook drops nearly to $19 in the past week. Consumer confidence rises slightly, but rising gas prices are a worry. Lowe's, Dell and Hewlett-Packard report in the week ahead.
The S&P 500 made a solid move above the closely watched 1,400 level in the last session, posting its biggest gain in two weeks. But trading volume remained low for the past week.
The Nasdaq outperformed the broader market as Apple shares reached an all-time high.
All three major averages have rallied more than 10 percent since hitting their intraday lows on June 4, and more than 5% since July 25 when Mario Draghi, president of the European Central Bank, promised to do whatever it takes to save the euro.
The six-week gains for the Dow and S&P 500 are their longest weekly winning streaks since seven-week runs from November 2010 to January 2011. The Nasdaq was higher for the fifth week in a row, its best streak since early June to early July. Its close was 46 points below its 2012 closing high of 3,122.57, set on March 26.
The rally has been accompanied by lots of skepticism, with critics warning stocks face big head winds from the November U.S. election, the domestic fiscal cliff and the continuing debt problems in Europe.
The stock market's performance suggests a number of investors don't buy the extreme worries. In addition, bond yields have been rising in the past few weeks, a signal that even bond investors see more economic growth.
From a sentiment point of view, the market has little to inhibit it from proceeding higher. And it appears that the rally is being sustained by stocks from varying sectors which provides for a solid base to propel the indexes further.
With few news headlines and light participation during summer holidays, traders are increasingly taking their cues from market technicals. The S&P 500 needs to close above 1,419.04, the index's April high, to make a new four-year high.
Also, the market overall was higher because of a decent report on consumer confidence from the University of Michigan. The Conference Board's Index of Leading Economic Indicators was stronger than expected. In addition, German Chancellor Angela Merkel's Thursday statement of support for the euro also cheered investors.
• The Dow Jones Industrial Average (DJI) was up 0.51 percent, to 13,275.20, for the past week.
Cisco (CSCO) led the weekly gainers on the Dow, while Merck (MRK) sagged.
• The Standard & Poor's 500 Index (SPX) was up 0.87 percent, to 1,418.16, for the week.
The S&P 500 has risen 2.8 percent in August and about 11 percent since a year low in June as traders eye some encouraging U.S. jobs data and highly anticipated policy meetings at the European Central Bank and the Federal Reserve in September.
The S&P 500 rose to a four-month peak on Thursday after comments from German Chancellor Angela Merkel reinforced investor expectations for action to tackle the euro zone debt crisis.
Among the key S&P sectors, techs led the gainers for the week, while utilities slumped
• The Nasdaq Composite Index (COMP) was up 1.89 percent to finish the past week at 3,076.59.
The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the market, hit a 5-year low of 13.43 before closing down 5.9 percent at 13.45.
Trading volume, which has been meager over the past several sessions during a seasonally slow period, was at 5.3 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq.
This past week has seen the lowest and second lowest full-day trading volumes of the year.
The low was hit on Monday with just 4.54 billion shares on the Nasdaq, the NYSE and the Amex, about two thirds of the daily average this year.
**For a more in-depth look at the past week…..CLICK HERE…..**
The Major ETFs in the Past Week
All the stock market index Exchange-Traded Funds (ETFs) made headway in the past week, and three of the four are in the vicinity of their 52-week highs.
A clear break above the 52-week high indicates another wave higher in a long-term uptrend could be underway. The current levels of these index ETFs are pivotal price points.
With declining volume and not all the indexes confirming the move to new highs, the possibility of a double top or false breakout to the upside remains a possibility. Therefore, this is a critical juncture for stocks, and it will determine if this uptrend continues or runs out of gas.
TOP OPTIONS TRADES SINCE JUNE 01, 2012
|HLF July 47.50 Calls||53%||APPL Aug 650 Calls||67%|
|DLTR Aug 110 Calls||32%||UIS Oct 17 Calls||79%|
|HSY Aug 70 Calls||56%||TSO Nov 25 Calls||54%|
|NKE Oct 92.50 Calls||49%||HLF July 47.50 Calls (again)||38%|
|FB Aug 25.00 Puts||500%||DISH Sept 30.00 Calls||100%|
|APPL Jan 13 650.00 Calls||71%||CSTR Oct 42.50 Puts||400%|
|LNKD Aug 92.50 Puts||30%||LNKD Aug 100.00 Calls||250%|
• Some equity strategists have boosted their S&P 500 targets up to early November -- but after the election expect stocks to fall -- recommend investors move into cyclicals.
• Some analysts said the election and fiscal cliff could hamper further market gains, but they wrote that the Citigroup surprise index could be signaling further gains.
• Other equity strategists see just modest upside for the rest of the year – target is 3 percent!
• Sentiment is very negative -- the average equity allocation among strategists was below 50 percent for the first time in almost 15 years. It usually runs at 60 percent.
• They believe everybody’s throwing in the towel -- there’s a real lack of conviction in the stock market -- there is conservative positioning from the investment base -- cash levels are high. However, those could all help to bolster returns through the end of the year.
• They see risks ahead, and investors would be wise to buy protection. The fiscal cliff could be a major negative if Congress lets automatic spending cuts bite into government agencies and defense spending. However, some think earnings would do okay, but it would stymie growth and it would be a negative for consumers and sentiment.
Stock Market Volume in the Week Ahead
True to form, market volumes have dried up in August. To some, the lack of volume is a clear signal of the relative weakness of the recent rally. Wall Street last week posted its two lowest volume days of the year, not counting half-days.
The VIX in the Week Ahead
What has some other strategists nervous is what they see as relative complacency among investors. Volatility levels as implied by the CBOE Volatility index .VIX, or VIX, are at their lowest since June 2007.
But, the VIX futures curve through to the end of the year is very steep, showing a heightened concern among investors that a spike in volatility could be in the offing.
The Major ETFs in the Week Ahead
If the 52-week highs are broken in the week ahead, and all the Exchange-Traded Funds (ETFs) continue to move higher, another wave of the uptrend is likely underway. There are warnings signs though. These are critical price junctures for these ETFs, and declining volume and not all the ETFs confirming each other indicates they may be running out of steam.
Price is the ultimate indicator though, and right now it is pointing higher. Watch the 52-week high for early indications of a continuation or reversal. In the event of a reversal, watch the trendline support level.
Earnings in the Week Ahead
Just over a dozen S&P 500 companies report earnings in the week ahead, with the highlight Tuesday as Dell (DELL) and Best Buy (BBY) post their scorecards. Lowe's (LOW) reports on Monday -- Hewlett Packard (HPQ) on Wednesday.
Of the 475 companies in the S&P 500 that have reported earnings this season, 68 percent have beat analyst expectations. That is higher than the long-term average of 62 percent and matches the average over the past four quarters.
Economy in the Week Ahead
Minutes from the Federal Open Markets Committee, which sets most Fed policy, are due Tuesday and everyone will be looking for hints that the Fed is planning more stimulus to jolt the slumbering U.S. economy.
The Fed disappointed markets last month by not announcing another round of quantitative easing, in which the Fed buys U.S. government securities to provide liquidity to financial markets and promote economic growth.
But most analysts believe the Fed made it abundantly clear that another round of buying is in the works if the economy doesn’t improve markedly by the time the Fed meets again in September.
Not all members of the FOMC agree that more stimuli are needed. The debate between these so-called hawks and the activists led by Fed Chief Ben Bernanke should be on full display with the release of the minutes.
On the housing front, the Mortgage Bankers Association mortgage index is out Wednesday; July existing home sales are also out Wednesday; July new homes sales on Thursday. The housing sector, key to the health of the overall economy, has been in a historic slump for nearly four years.
A glut of housing the result of speculative building and record foreclosures have kept home prices falling in most areas of the U.S. since the housing bubble burst in 2008. That downward momentum has yet to turn around and most economists predict there will be no sustained economic recovery until the housing market hits bottom and starts to move higher.
The health of U.S. manufacturing will be gauged in the week ahead with the release Friday of a report on durable goods orders.
Further Articles Relating to the Week Ahead
1. The Economy and Earnings in the Week Ahead – August 20, 2012
2. The Past Week Stock Market Results – August 20, 2012
3. The Major ETFs in the Week Ahead – August 20, 2012