Today's decline has things looking a little more bearish than they've been the past couple of weeks but in reality all we have is a tight trading range full of choppy price action. We're still waiting for a break out of the range and the return of some volatility.
Today's Market Stats
The stock market is stuck in a rut and neither side has pushed very hard to get the market unstuck. That might not change until we get into September but possibly the Fed's Jackson Hole meeting on Thursday and Friday might provide a reason for one side or the other to get a little more energetic. At the moment there's little interest in the market, although today showed a little more volume than we've seen recently (on a down day so that's not encouraging for bulls).
There was little in the way of economic reports to move the market today but the existing home sales was a little disappointing, especially after the strong new home sales report on Tuesday. The 5.39M annualized sales number was less than June's 5.57M and less than the 5.54M the market was expecting. Following that report at 08:30 the equity futures tumbled lower and we started the day with a gap down. A morning bounce attempt led to stronger selling in the afternoon and depending on the index you look at it looked either bearish or just a continuation of the sideways choppy trading range.
I've discussed in the recent past the enormous support provided to the stock market by corporations and their stock buybacks. Well over $2T has been pumped into the stock market since 2009 thanks to cheap borrowing costs and lack of investments in their businesses. Instead of investing in capital equipment, business expansion or new business ideas we've seen companies instead boost dividends and buy back a lot of their stock. Fewer outstanding shares boosts earnings per share and that has created a false sense of value for these companies.
With earnings declining (6 quarters in a row) and borrowing in decline we're seeing a reduction in stock buybacks as can be seen on the chart below (data from TrimTabs Investment Research). With the drop of support from corporate buybacks it's going to be much more difficult for the remaining bulls to power the stock market higher. We could see more money come in from foreign sources but at this point that's an unknown. What we do know is corporations are cutting back significantly and the stock market is losing that prop. Can the Fed save us now?
Slowdown in corporate buybacks, August 2015 - August 2016, chart courtesy Casey Research
At the same time the market is losing the support that has propped it up so strongly we see bullish sentiment hitting extremes that have led to trouble in the past. Neither of these measures are good market timing tools but it's important to be aware of those times when the market has become more vulnerable to a catalyst that will cause selling.
The chart below is one from Tom McClellan, which tracks the Investors Intelligence report on Bulls minus Bears vs. the S&P 500. This report shows the percentage of bullish vs. bearish newsletter writers. McClellan noted that not only is the difference high (Bulls 56.7 vs. Bears 20.2, for a difference of 36.5) but that it's also above the upper band (one standard deviation away from the 50-dma), each of which is a danger sign for a possible top at any time. What he also noted was the steady increase since the June 27th low and how steady the spread in the bands has remained. It's almost as though the market's been manipulated higher but we know that can't happen (cough) so at this point it's just an interesting phenomenon.
The significance of the way the sentiment picture has developed is that it is high and has gone steadily higher instead of running in fits and starts, which indicates a steady increase in bullish complacency. This is very likely due to the fact that the market hasn't made a move greater than 1% in 33 trading days, counting today. That's nearly 7 weeks where the market has made very small moves and it seems to have lulled most into a false sense of security with an expectation that the rally will simply continue. We all know what happens when the majority believes in one direction for the market. Ah yes, I know, this time is different. The VIX is very low and the Bollinger Bands are very tight -- what could possibly go wrong here?
Investors Intelligence report vs. SPX, chart courtesy Tom McClellan
This market has even sucked me over to the dark side with the bulls (wink) as I think the market has higher to go. But I'm only short-term bullish since I believe September is not going to be kind to bulls and if we do continue to get marginal new highs into a potentially important turn window in the first week of September it would then be a setup for a strong selloff to reverse the rally from June. My opinion is of course subject to change as the market dictates. I could turn bearish tomorrow or not until after the election (some of us believe there's a strong government effort to hold the market up until November to ensure the Democratic party remains in power). Price will let me know when to step off the bull train and get on the southbound bear train but as of right now I don't see the southbound train as ready to leave, although admittedly today has me wondering, as I'll show on the charts.
I'll start tonight's review with the NDX since its price action right here could tell us whether or not to shift over to the bearish side of the fence sooner rather than later. While I feel short-term bullish, based on some timing factors and a lack of a clear ending pattern to the upside, I also know this market is vulnerable to a fast move down and it might be from just a small catalyst that prompts more selling than what catalyst called for. Profit taking leads to stop runs which leads to strong selloffs. Sometimes it's no more complicated than that.
Nasdaq-100, NDX, Weekly chart
For the rally from February NDX would achieve two equal legs up at 4865, less than 30 points above this week's and last week's highs. That projection crosses a trend line along the highs from July-November 2015 next week. Between that and a turn window in the first week of September it would make a good time for a top to form. Depending on the form of the decline (impulsive or corrective), whether from here or from a little higher, I'll get a better sense about when a top is likely in place but so far there's no evidence to suggest we've seen the top.
Nasdaq-100, NDX, Daily chart
The NDX daily chart is the one that's causing me to feel like a top is now in place and while I'm not ready to get aggressively short yet I do have some short positions for my JIC trade (just-in-case). NDX has been struggling to break through resistance at its March 2000 high at 4816.35. After being rejected at that level twice, on August 9th and 11th, it finally closed above it on August 15th. But then it dropped back down below that level the next day. One failed breakout attempt. It then repeatedly banged its head at that level last week before getting back above it yesterday, only to pull back to the line by the close (4818.48). Today it gapped back down below and closed lower than the previous 9 sessions. Two failed breakout attempts and now a double top with bearish divergence. I have to say the price action on the NDX daily chart has me wanting to get aggressively short here. As noted at the bottom of the chart, the oscillators support the idea of a rolling top at major resistance. While I'm aware of a possible high in the first week of September, I'm not feeling the bullish love here.
Key Levels for NDX:
- bullish above 4820
- bearish below 4689
S&P 500, SPX, Daily chart
I've been thinking for the past few days that we might see a rising wedge pattern complete for SPX in another week or two but today's selloff has made that pattern questionable. It could still chop its way higher, which is what I show on the daily chart, but something more bearish could be starting. A continuation lower on Thursday would have me more seriously questioning whether we should expect another new high into next week. Below the August 2nd low near 2147 would be convincing evidence the high is already in place. Like NDX, we have a double top between the August 15th high and yesterday's high, both near 2194. But there's still a chance for a choppy move higher into the first week of September, which could see SPX up near 2215 before the rally will be complete.
Key Levels for SPX:
- bullish above 2194
- bearish below 2147
S&P 500, SPX, 60-min chart
The 60-min chart shows the uptrend line form August 2-17 as the bottom of the rising wedge that I've been watching but today's decline dropped SPX below it, now near 2179. It's possible we're going to get an a-b-c pullback from August 15th, which would have two equal legs down at 2168, and then another rally. Considering the 2168 projection and the August 17th low near 2168 I'd say the pattern turns more bearish below that level. But at the moment I think bears need to be ready for the possibility of another rally to kick off from here or from 2168. The late-day bounce back up today got SPX to close at price-level support near 2175. We've had nothing but choppy 3-wave price action since mid-July and that makes it very difficult to project a price pattern from here. But keep in mind that sharp declines since mid-July have been conclusions to pullbacks and not the start to a more serious decline. The decline from yesterday could be the same thing (to complete an a-b-c pullback from August 15th) and the bounce back up to support near 2175 might be the start of a reversal back to the upside. We should find out quickly Thursday morning.
Dow Industrials, INDU, Daily chart
The Dow has been a little weaker than the other indexes and slow rollover from its August 15th high could be the start of a stronger decline. But as with the others, there's no clear ending pattern to the upside and the pullback from August 15th looks choppy and more like a corrective pullback than something more bearish. It could suddenly break down, which would change the corrective pullback into an impulsive decline but at the moment I don't get a warm and fuzzy feeling for the bears here. As with SPX, an a-b-c pullback from August 15th would have two equal legs down at 18430, 18 points below this afternoon's low and a drop below that level would start to look more bearish. A drop below its May 2015 high at 18351 would have me growing some bear claws but for now I'm anticipating the bears will get another slap in the face with a rally that "shouldn't happen." The bears rightfully complain there is no fundamental reason for the market to rally. But that's like arguing the market should be logical.
Key Levels for DOW:
- bullish above 18,670
- bearish below 18,247
Russell-2000, RUT, Daily chart
I've been tracking the same idea for a rising wedge for the RUT and it continues to hold inside the wedge after today's decline. Yesterday's high was a test of the top of the wedge and today's low was a test of the bottom of the wedge. Yesterday's high fits well as the 3rd wave inside the wedge and the decline from yesterday fits as the 4th wave, which gives us a setup for just one more push higher to complete the 5th wave and for now I show a projection to about 1264 by September 1st. A drop below the August 17th low, near 1222, would have it looking more bearish and above 1267 would be more bullish, although the significant bearish divergence does not suggest a more bullish outcome from here.
Key Levels for RUT:
- bullish above 1267
- bearish below 1221
10-year Yield, TNX, Daily chart
Bonds have been trading in a tight range since the July 21st high for yields (lows for bond prices). TNX and TYX (10-year and 30-year, resp.) have each formed a sideways triangle for their consolidation patterns and they should soon be ready to break out to the upside. The July 6-21 rally has been followed by a sideways triangle, which points to another leg up. For TNX we could see a rally to its broken uptrend line form July 2012 - January 2015 and its 200-dma, which will both meet soon near 1.82%. Another leg up would have it achieving two equal legs up from July 6th near 1.8%-1.82%, depending on where the triangle consolidation finishes. Bonds seems to be waiting for the Fed's Jackson Hole meeting, which starts on Thursday, and at this time it's looking like they might take a hawkish stance and prompt a bond selloff (yield rally). That could actually help the stock market so it will be something else for stock market bears to consider. However, notice the previous sideways triangle in March-May 2016, which led to a breakdown instead of a rally so the only thing we can know at this point is that there's likely to be a big move soon out of this sideways triangle.
Transportation Index, TRAN, Daily chart
The TRAN has been bumping up against resistance since breaking its uptrend line from June 27th last week. In addition to multiple back-tests of the broken uptrend line, yesterday and today it also hit its downtrend line from August-November 2015, near 7950. Since the August 2nd low MACD has barely lifted its head off the mat at the zero line, which is not exactly a sign of strength. If anything, running up to double resistance has it looking like a setup to get short here.
U.S. Dollar contract, DX, Weekly chart
The US$ has dropped down near support at the top of its parallel up-channel from 2008-2011 and the one from May 2011, near 94.35 and 93.65, respectively. In addition to those support levels there is a projection to 93.82 for two equal legs down from July 25th and last week's low was 94.05. So the dollar is down to a support zone and I'm now waiting to see if it will start another rally leg. Depending on what comes out of the Jackson Hole meeting tomorrow and Friday we could see a dollar reaction (hawkish comments would be bullish for the dollar).
Gold continuous contract, GC, Weekly chart
Not much has happened to gold prices since it topped on July 6th at 1377.50. It looks like it might be forming a sideways triangle that could continue for another few weeks before breaking out. A sideways triangle here should lead to one more push higher and that would have it reaching its downtrend line form September 2011 - October 2012, currently near 1404 and potentially higher. A drop below 1307 would be a bearish heads up for at least a larger pullback and potentially something more bearish.
Oil continuous contract, CL, Weekly chart
Last week oil popped above its downtrend line from June 2014, currently near 47.80, but has dropped back down below the line this week, which at the moment leaves a failed breakout attempt. A rally above last Friday's high at 48.75 would be bullish and then it would be more bullish above price-level resistance near 51. But the larger pattern supports the need for another leg down and a drop below its 50-week MA, currently at 41.56, would be bearish, especially a weekly close below that level.
Other than the unemployment numbers tomorrow morning, we'll get the Durable goods orders for July, which are expected to show a reversal of June's numbers. There could be a negative reaction in the pre-market futures if that doesn't happen. On Friday we'll get the 2nd estimate for GDP in the pre-market session, which isn't expected to change much, and then Michigan Sentiment at 10:00, which is also expected to stay steady with July's number.
With a tight trading range and choppy price action for nearly two months we are left wondering if the market is in a topping pattern or just a consolidation before heading higher into the end of the year. We're seeing significant bearish divergences at recent highs compared to the ones back in July but sometimes what appears to be bearish divergence is nothing more than the market relieving the overbought conditions as the market trades sideways. This latter interpretation is quite bullish and therefore the bears need to stay cognizant of that possibility.
Arguing for the bearish case is the high bullish sentiment as the market's momentum to the upside fades. Trading volume has been very light this month (about 30% lighter than the average for August) but today's volume was heavier and on a down day that's not a good sign for bulls. From a timing standpoint there's a potentially important turn window in the first week of September so a continuation of a choppy move higher into the turn window will have me watching carefully for a market top. But stay aware of the potential for this market to break down sooner rather than later. As discussed with the NDX charts, there are enough bearish signs to be extremely cautious about further upside.
As mentioned earlier, I am short-term bullish into the first week of September but only if prices turn back up from here. A further decline would have me wondering if an important top is already in place.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying