Would you believe that summer is almost over. Some school systems have already started classes. Looking back at summer 2012 it has been a rocky ride. Stocks would rally for a few days and then decline for a few days. Yet the overall trend has been higher - at least since the early June lows. That volatility vanished this past week. The dog days of summer have seen volume plunge to near Christmas-season levels. Volume will likely stay in hiding until after the early September Labor Day holiday.
It was a busy week for economic data. Manufacturing data continues to disappoint and suggest a potential recession ahead. Yet a surprise improvement in consumer sentiment and retail sales in the U.S. helped fuel market gains. A few of the noteworthy headlines from this sleep-inducing week on Wall Street was an Apple (AAPL) upgrade and a $900 price target as Wall Street gets excited for the company's widely expected iPhone 5 launch this fall. Shares of AAPL broke out to new all-time highs on Friday, making AAPL the first company in history to hit a $600 billion market cap. Meanwhile shares of Facebook (FB) continue to plunge. The stock is down -50% from its $38 IPO price (just three months ago) following a massive lock up expiration of 270 million shares this past week.
Here's a quick review of recent U.S. economic data. Industrial production rose +0.6% in July, while capacity utilization came in at 79.3%. Both were in-line with estimates. The wholesale producer price index (inflation reading) came in at +0.3% in July, which was higher than the +0.2% estimate. The consumer price index (inflation) reading was unchanged (+0.0%) in July versus a +0.2% estimate.
Housing permits rose to an annual pace of 812,000 compared to estimates of 770K but housing starts only rose to a 746K pace versus estimates of 763K. Meanwhile the weekly initial jobless claims were pretty much in-line with estimates at 366,000.
Manufacturing data continues to disappoint. The New York Empire State manufacturing (Fed) survey plunged to -5.9 in August. Readings under zero indicate contraction. July's reading was 7.4 and economists were only expecting a drop to 6.0 in August. The Philly Fed manufacturing survey rose to -7.1 in August after July's -12.9. Economists were expecting a rise to -6.5. This is the fourth month in a row the Philly Fed has been in contraction territory.
We did see some positive news. The retail sales number for July rose +0.8% compared to estimates for only +0.3%. This ended a three-month string of declines and revived hope that the U.S. consumer wasn't dead yet. The preliminary University of Michigan consumer sentiment survey for August was 73.6. That's up from the prior reading of 72.3 and better than the estimate of 72.2. The current conditions component hit its best levels since January 2008. The rise in sentiment is a little bit surprising with gasoline prices hitting their highest levels in three months. Speaking of fuel, if we look at the price of oil in Europe this past week saw Brent crude oil, hit a new all-time record high of 94.83 euros a barrel.
The S&P 500 index advanced +0.8% last week, marking the sixth weekly gain in a row. Year to date the index is up +12.7%. The S&P 500 spent the first three days of the week churning sideways then surged on Thursday toward the next level of resistance near 1420. The high for the year was April 2nd at 1422.
Can the S&P 500 breakout past resistance at 1420? Anything is possible but we've got two weeks left in August and Ben Bernanke's speech in Jackson Hole is coming up on the 31st. Will stocks churn sideways until the Fed Chairman's speech on monetary policy and the economy or will momentum carry stocks higher? After a six-week rally the bears could easily argue that stocks are overbought and due for a correction lower, especially now that the S&P 500 is at resistance.
If the S&P 500 does see a pullback we can look for support near 1400 and then 1380. If it does manage to breakout then we can look for resistance in the 1440-1450 level.
Daily chart of the S&P 500 index:
The tech-heavy NASDAQ has continued to show strength. Big gains in technology big caps like AAPL, GOOG, AMZN, and CSCO have all played a role. The NASDAQ held support near 3,000 early in the week and then surged past potential resistance at the 3050 mark. Now the NASDAQ is nearing the early May highs in the 3075-3080 area.
If the NASDAQ does see a pullback we can look for short-term support near 3025. Overhead resistance remains 3100 and the 2012 highs near 3125-3130. The high for the year is 3134 on March 27th. FYI: The NASDAQ gained +1.8% for the week and is up +18.1% for the year.
Daily chart of the NASDAQ Composite index:
There has been a lot of digital ink already spent discussing the lack of confirmation of the market's rally by the small caps and the transportation sector. Traders have learned to distrust any rally if the small caps and the transports are not participating. This past week that finally changed. Both the small cap Russell 2000 index and the Dow Jones transportation index delivered strong gains. While both continue to lag the big cap indices like the NASDAQ, SP500, and the Dow Industrials but the rally this past week helped soothe some concerns.
The $RUT is up +2.2% for the week and now up +10.6% for the year. Meanwhile the Dow Jones Transportation average is up +2.5% for the week but only up +3.4% for the year. The $RUT has rallied straight to resistance at 820. A breakout here could signal a run to 840 while support is back near the 800 level.
Daily chart of the Russell 2000 index
Daily chart of the Dow Jones Transportation Index
It is worth noting that the volatility index ($VIX) is plunging. Normally low levels on the VIX are a sign of investor complacency and that usually precedes a market top. An old market adage says, "when the VIX is low, it's time to go". Unfortunately, using the VIX as a timing tool is way more art than science. The volatility index can remain low for a long period of time.
You'll notice on the chart that the $VIX has fallen to levels not seen since June of 2007. It's definitely a signal to be aware of.
chart of the Volatility Index (VIX) index
The event and economic calendar is pretty quiet this week. We'll get some additional data on home sales. The big event is probably the FOMC minutes from the last meeting (due out Tuesday). We will still see a few earnings reports. Some of the bigger names reporting this week are: DELL, BBY, MDT, URBN, HPQ, CRM.
It was a year ago, September 2011, when Germany approved the European Financial Stability Facility (EFSF) and the ESM. These are two bailout funds to help bring stability to the Eurozone. Now the German courts are going to announce whether or not these are constitutionally legal on September 12th. If the German court says "no" it could spark some volatility in the market.
A few events to be aware of:
Aug. 31st - Federal Reserve Chairman Ben Bernanke speaks at the Fed's annual Jackson Hole summit.
Sep. 13th - next FOMC meeting
Also in September, the IMF will release their review of Greece. Plus, the U.S. will likely hits its debt ceiling again.
Economic and Event Calendar
- Monday, August 20 -
- Tuesday, August 21 -
FOMC minutes from the last meeting
- Wednesday, August 22 -
Existing Home Sales for July
- Thursday, August 23 -
Weekly Initial Jobless Claims
New Home Sales for July
- Friday, August 24 -
Durable Goods Orders for July
The Week Ahead:
Honestly, little has changed for us since last week. Stocks are still climbing on expectations of new stimulus from central banks in China, Europe, and the U.S. This past week stocks got a boost when Germany's Merkel seemed to lend her support behind ECB President's recent comments about doing whatever it takes to save the Eurozone. Shorts continue to cover as stocks refuse to correct lower. Now here we are testing our highs for the year. If Ben Bernanke disappoints the market in his speech on the 31st or in the FOMC meeting on September 13th then the market is likely to go down.
Elsewhere if we don't hear anything out of China soon or if the situation deteriorates in Europe, it could spark some profit taking. It seems like we're hearing more and more cooperation from Germany as it works with its neighbors to solve the EU's financial struggles. yet there are still serious issues unsolved. All they have done so far is continue to kick the can down the road. Finland has actually started to consider what would it take to exit the euro if they need to. Finnish leaders admit that the EU will eventually run out of money to throw at these problems. The Fins don't want to be on the hook for additional bailout bills. Nobody wants to be the first to leave the euro since they'll be seen as the bad guys that crashed this multi-nation experiment.
In other news the saber rattling between Iran and Israel is picking up. Iran has issued several more outrageous statements about destroying Israel. This is likely political grandstanding to save face at home. Currently Iran's economy is out of control. Inflation is surging. There are reports that food inflation was running at +5% a month. That means in five months your food costs +20% more. It's easier for Iranian leaders to focus popular attention on a common "enemy" like Israel than solve their domestic problems.
Plus, there has been talk for months that Israel might launch a unilateral attack at Iran's nuclear infrastructure before the end of summer 2012. Well here we are running out the last days of summer. I certainly hope no one is stupid enough to pull the trigger since oil prices would skyrocket and global stock markets would plunge on an outbreak of hostilities.
At the moment we have a U.S. market that continues to rally while ignoring the weeks and weeks of bad economic news. We're just weeks away from the U.S. presidential campaign. We're two weeks away from Bernanke's speech in Jackson hole and about three weeks away from the next Fed meeting. On top of it all the stock market's big cap indices have rallied to resistance at their 2012 highs. Do you buy stocks now? Do you wait for a correction?
Personally, I would hesitate to buy stocks with the market sitting just beneath resistance following a multi-week rally. Chances for a pullback are just too high. However, there are always individual stories that might make certain stocks compelling. Just remember that the broader market's movement can account for up to 80% of individual stock's performance. Volume is going to remain low the next couple of weeks. As LEAPS traders we are supposed to have a longer-term time frame. Readers may want to take a wait and see approach and see how the market reacts to Bernanke's speech at the end of August before starting any new significant trades.