Traders are counting down the days until the worst six weeks are over.
Monday will be the start of the fifth week of the most volatile six-week period of the year. Everyone is holding their breath either hoping there is a bigger drop that provides a buying opportunity or hoping there is no drop and their current long positions are safe.
With the Fed announcement and the BoJ announcement next Wednesday that is likely to be a major hurdle for investors. Once past Wednesday there are only 7 trading sessions left in the volatile six-week period.
Obviously, that is not a hard and fast date and the volatility could end at any time or continue through the election. For fund managers that latter option would be scarier than the Exorcist. They want the dip to occur next week and then they want clear sailing until their fiscal year end on October 31st. Unfortunately, we rarely get what we want. I want to win Power Ball but that is hard to do without buying a ticket.
The market is behaving rather well. Other than the Dow, S&P and Russell 3000 the rest of the indexes are maintaining their upward bias. The broad market Russell 3000 has an identical chart to the Dow. The big drop on the 9th followed by five days of strong volatility. The R3K should be viewed as "the market" rather than the Dow but that would be hard to convince most investors. This is the 3,000 largest stocks in the market and any stock not in the R3K is miniscule and not relative to the overall market.
The fact the R3K has not broken below support at 1,250 is bullish. This suggests the market is not going lower in the limited time we have left in the normally volatile period. Obviously, a major drop can still occur just like it did last week but after a week of trying to push stocks lower the bears may have run out of conviction.
On a shorter term scale the Dow remains in a downtrend with a series of lower highs. However, the support at 18,000 is solid. One more good test next week, that produces another strong +200 point rebound, would be the ideal portfolio manager buy signal. Conversely, a break below 18,000 would be very negative and could suggest a much lower low.
The small cap S&P-600 had been leading the market higher. The pattern on this short term chart is a textbook picture of a lackluster rebound from strong support after a sharp decline. In theory, these patterns break to the downside after the dip buyers begin to fade when the rebound slows. However, the index was down only slightly on Friday and there is the possibility that multiple test of support across five days was sufficient to bring buyers back into the market. Time will tell.
Another successful dip to support followed by a rebound back to 740 would be the perfect picture of a conviction retest and would suggest a continued rally.
We did see a correlation tumble last week when bonds and treasuries sold off. The High Yield ETF rolled over and that weakened the market momentum. If the HYG continues to decline it could drag the market with it. The correlation is normally very strong with the HYG as the leader.
The cumulative advance-decline line on the S&P has begun to weaken. The MACD rolled over in late July after the initial market spike to the 2,100 level on the S&P. Since then it has been a fight to hold that level. If the AD line drops below the 3475 level from last week, we could see some institutional investors begin to head for the sidelines.
The same AD chart for the Dow shows a two-month low last week and a decided lack of momentum. The Dow appears ready to roll over and break below the 18,000 level if you measure its strength by the AD ratio. You need more advancers than decliners to maintain a bullish market and that ratio is slipping.
The percentage of S&P stocks over their 200-day average fell to 71.8% but that is still bullish as long as the decline does not accelerate. Of greater concern is the dramatic decline for stocks over their 50-day average. The percentage fell from 87.4% in late July to 29.8% at the low last week. This is a short-term representation of the direction of the market. The shorter-term average overshot the price and many stocks are now generating sell signals as they cross below that average.
We talk a lot about the health of the global economy. The global equity market is also a concern. The Dow Global Index had broken above resistance in late July but fell back to that level last week. A decline below Friday's close would be negative.
The biotech sector is struggling. The prior week it was drug-pricing headlines. Last week it was failing drug trials. The Novavax trial news on Friday threw a wet blanket over all the drug research companies. I thought the $BTK was going to break out on Thursday when it closed over 3,400. Friday was a setback but it could be short lived with the Gilead Sciences news and expectations for them to go on a shopping binge. If the BTK can rebound to close well over 3,400 again, it could breakout and help lift the Nasdaq to a new high and that would be very positive for market sentiment.
The Nasdaq was hit the prior week by negativity ahead of Apple's iPhone announcement. The chip stocks that supply Apple were leading the $SOX lower and that was dragging the Nasdaq lower. The instant turnaround from the news of the iPhone sales was dramatic. The correlation remains intact and both indexes closed just under new highs.
I am neutral on the market for Monday. The Tuesday before a Fed announcement is normally positive. The day of the announcement is mixed with higher volatility. The day after the announcement is normally when the market picks a direction. Of course, all of those "normal trends" can be erased in a heartbeat by a flurry of negative headlines.
The New York bombing that injured 29 people late Saturday could be a factor that moves the markets on Monday. Details are still sketchy and anything is possible. If it turns into a terror event the market will likely move lower. One random bomb is bad. Multiple random bombs over the next several weeks is a disaster. Eventually the terrorists are going to realize they do not need to commit suicide with their attacks and they can be a lot more productive with multiple minor attacks that cause minimal damage physically but major psychological damage to consumers as a whole. A dozen random bombs over a span of several weeks before the holiday shopping season could cause serious economic harm even if they never killed anyone.
Keep your eyes on the headlines and your finger on the exit trigger while the markets are open.
Enter passively and exit aggressively!
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