As mentioned earlier the S&P 500's drop on Thursday broke its trend of more than 60 days in a row without a 1% move either direction. There was no follow through lower on Friday. Instead traders bought the dip and the S&P 500 closed the week with a +0.5% gain. It's only seven points away from the July 3rd all-time closing high of 1,985 and the index ended the week with a 7.0% year to date gain.
Technically Friday's move is an inside day, which suggest investor indecision. We can argue there is short-term support in the 1950 area and overhead resistance in the 1985 area. I suspect that a breakout past 1985 would signal a run towards the 2,000 mark. I am a bit concerned the 2,000 level could be tough, psychological, round-number resistance. If stocks retreat then a drop below 1950 might signal a correction toward the 1900 level, which should be round-number support.
chart of the S&P 500 index:
Weekly chart of the S&P 500 index
The NASDAQ ended the week with a +0.38% gain thanks to a +1.5% bounce on Friday. This follows a -1.6% loss the prior week. The early July highs near 4457 is a 14-year high. On a short-term basis the NASDAQ might be in a 4350-4450 trading range. I suspect a breakout past 4450 would spark a rally to 4500. Meanwhile a breakdown under 4350 could signal a deeper correction. 4300 and 4200 are likely levels of support. Year to date the NASDAQ is up +6.1%.
chart of the NASDAQ Composite index:
Weekly chart of the NASDAQ Composite index
The small cap Russell 2000 index remains the problem child for the U.S. markets. It has continued to plunge after reversing at resistance near 1210 in early March. However, there is hope. Friday's +1.5% gain has created a bullish engulfing candlestick reversal pattern on the daily chart of the $RUT. This pattern needs to see confirmation. Otherwise the path of least resistance remains lower and the $RUT could be headed for support near 1080. Last week the $RUT posted a -0.7% decline and its year to date loss is -1.1%.
chart of the Russell 2000 index
Economic Data & Event Calendar
The week ahead is a quiet one for economic data. The CPI and the durable goods numbers will be the ones to watch but I doubt either will be market moving.
The biggest events could be geopolitical as the Israeli ground offensive continues.
It will also be a very busy week for corporate earnings, potentially the biggest week for earnings with over 550 companies announcing quarterly results. Thursday alone will have more than 250 companies reporting earnings.
Economic and Event Calendar
- Monday, July 21 -
Chicago Fed survey
- Tuesday, July 22 -
Consumer Price Index (CPI)
Richmond Fed survey
Existing Home Sales data
- Wednesday, July 23 -
HSBC China manufacturing PMI data
- Thursday, July 24 -
Weekly Initial Jobless Claims
New Home Sales data
(Huge day for corporate earnings with over 250 companies announcing)
- Friday, July 25 -
Durable Goods Orders
Additional Events to be aware of:
July 30th - FOMC meeting
Sept. 1st - U.S. market closed for Labor Day
It feels like summer just got here but school starts in just a few weeks. Retailers are gearing up for the back-to-school shopping rush (BTS). The BTS season is the second biggest event for retailers behind Christmas. Some analysts use the BTS spending numbers as a guide for how the Q4 holiday season might pan out. That is not good news this year. Fortune.com recently published an article suggesting consumers remain cautious and likely to spend less this year. The National Retail Federation estimates that the 2014 BTS season could see spending fall to $26.5 billion, which is a little behind last year. The NRF also noted that more shoppers were planning to wait in hopes of catching promotional and discounted deals before school begins. That's not good news for retailer margins.
There have been some interesting and somewhat conflicting numbers on investor sentiment. The most recent Investors Intelligence survey said the stock market's bull/bear ratio was 4-to-1. That's very bullish. Yet a Bloomberg Global Poll noted that 47 percent of investors surveyed felt that stocks were near unsustainable levels and 14 percent felt stocks were already in a bubble. The Investors Intelligence number (4:1) is the highest reading this year and nearing levels not seen since 1987. Contrarians use extreme (bullish) sentiment indicators as a warning signal that stocks could be near a top.
Another sentiment indicator of a different sort is the Merrill Lynch Fund Manager Survey. This survey found that 61 percent of global fund managers were already overweight equities. That is notable because fund managers haven't been that bullish on stocks since February 2011. That was just before the Eurozone financial crisis started heating up. Merrill Lynch went on to speculate that any summer rally would likely be followed by an autumn correction lower.
Here's one more warning to keep in mind. The good folks at the Stock Traders Almanac have pointed out that:
"On average, the year prior to a Fed Funds rate increase has been positive. However, one month after a major shift in policy to tightening, the market has never been up, and averaged a loss of 2.8%. Three months later has been even more negative with an average loss of 4.9%. From six months to one year later, the averages are still negative, but a few modest gains have occurred. Also notable are that the last two times that tightening occurred with DJIA at or near all-time highs (1973 and 1999) the impact was clearly negative."
We already know that the Federal Reserve is planning to end its current QE program in October. Right now analysts are speculating if the Fed will start raising interest rates in the first half or the second half of 2015. Of course the Fed's response would be any decision is "data dependent". The historical data above would suggest that 2015 could be a down year for stocks. Meanwhile the most hated bull market in history continues to climb the wall of worry.
Let's assume for the moment that no one is going to war with Russia any time soon. Let's also assume that in spite of a wave of negative headlines surrounding Israel's foray into Gaza the Israelis will be done in the 10 to 14 days they estimated for the ground offensive and then they pull out. That means the current geopolitical hotspots are unlikely to impact the market's rally. Stocks will be left to move on earnings news alone.
This is a huge week for earnings with over 550 companies reporting. The overall tone of earnings results and guidance could determine market direction for the next few weeks.