We are reaching that point on the calendar where a significant amount of uncertainty should be resolved. Deutsche Bank has raised $3 billion in capital and is reportedly working on a deal for $5 billion more from Qatar. The bank is not in danger of failing. A settlement with the Dept of Justice would be market positive.
The election could be decided early next week after Trump's lewd comments about women became public. If his debate performance on Sunday night is similar to the last debate, Clinton should surge in the polls again with only four weeks left in the race. That would be market positive.
The FOMC minutes should give us a good idea about whether the November Fed meeting could see a potential rate hike. If it appears the Fed is planning on waiting until December, it would be market positive.
The Q3 earnings cycle kicks off next week with three of the major banks reporting on Friday. If their earnings and guidance are decent that would be market positive.
That would bring us to the end of the second week in October and the last two weeks are normally bullish.
While we cannot count on the market reacting in a logical fashion, these events should remove some of the uncertainty and allow portfolio managers to start adding to positions for the end of their fiscal year on October 31st. We normally see quarter end window dressing but once a year we see fiscal year end window dressing and that happens at the end of October.
The S&P-500 is moving slowly sideways between 2144-2164 and the momentum indicators are turning negative. This normally happens when there is no directional movement. The weight of the internals (volume, A/D, etc) begins to drag on the indicators.
If I just looked at this chart and did not know the symbol or the date on the calendar, I would say it was bearish. As the smart investors we are, we tend to let our intelligence get in the way of our common sense. I just explained in the paragraphs above why the market should move higher in the last two weeks of the month. None of those factors was related to a chart.
In theory, charts show us the discounted present value of all those events because they are all already known. In practice, the charts are headline driven. They may rally or sell into a particular headline but once that news breaks, all bets are off. It is called a sell the news event.
I am concerned we could see a sell the news event at any point this week. There may be one more material decline to support at 2,120 before an end of October rebound. That is my conventional wisdom speaking rather than my technical view of the chart.
The Dow pattern is similar only the 100-day average has suddenly appeared as support. The resistance at 18,350 is also rock solid so we are back in the narrow trading range like we saw in September only the intraday swings are more pronounced.
The Dollar caused some problems last week with a spike to a two-month high. That caused a drop in gold and silver and weighed on equities but oil prices were undeterred. They are riding a wave of speculation that OPEC will actually do something to limit production in November.
If the dollar continues higher in anticipation of a rate hike, it will cause numerous problems long term.
Gold has declined from $1,350 in mid September to $1,250 on Friday because of dollar strength and a rebound in Deutsche Bank.
The Semiconductor Index closed just below a new high on Friday and that helped to support the Nasdaq. The biotech sector was negative during the week but closed positive on Friday. That held the Nasdaq to a minor 19 point loss for the week.
Another measure of market strength is the percentage of S&P stocks over their 50-day average. That has fallen to 43.2% and still declining. As I scanned stocks for potential plays this week I noticed a lot be charts turning bearish. I believe this is due to the normal negativity that occurs in the first two weeks of October. This 50-day chart confirms my observation that a lot of stocks are fading.
The percentage of stocks over their 200-day average is 68.4% and a two-month low. That is still a high percentage because 200 days is roughly 9 months of trading. Those averages are still well behind the stock price.
The S&P Bullish Percent Index has declined to 66.6%, down from 77% just a couple weeks ago. This is the percentage of S&P stocks with a buy signal on a point and figure chart. This is nearing a three-month low.
The correlation between the high yield bond market and the S&P has risen to 92%. That is very high and with interest rates expected to rise, it should continue to be high unless the equity market fades. The HYG tends to lead equities and it is doing so today.
All of the various charts seem to concur that market strength is fading. That means it is even more critical that the clouds of uncertainty be cleared this week so that fund managers feel confident in window dressing for their fiscal year end. If the market continues to fade, they will want to show more cash. If the market begins to rebound and the Nasdaq breaks out to a new high, they will be throwing money at the market before month end.
There are a lot of "ifs" in the forecast and this coming week could be rocky. If we are lucky enough to get a dip on the S&P back to 2,120 I would be a strong buyer on any rebound from that level.
Enter passively and exit aggressively!
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