For the second week in a row the S&P 500 slipped in four of five sessions and finished the week lower. The past week the index dropped 2.10% further. The current pullback has also reached a significant level as Friday finished 3.15% lower than the August 2 highest close of 1709.64.
The volume during Thursday’s selloff on the S&P 500 was the highest seen since the run up on August 1, and higher than both the 13 DMA and 50 DMA. Since the dip began volume has dropped substantially and lowered both these moving averages quite a lot. The higher volume was lower than the index’s average volume this year. Prior to Thursday’s pullback, the first and third highest volume days were on the only two days the index increased in an eight day stretch.
The index has risen in 94 of 158 sessions this year. The average volume on the 64 days the index saw setbacks this year are over 700 million shares higher than Thursday’s volume. So although Thursday saw volume higher than short term averages, the volume during this pullback was well below averages seen this year. The low volume seen on down days indicates below average investor support of this pullback.
It is interesting what caused this pullback, a very good weekly jobs report as new weekly claims fell to the lowest levels in almost six years. A report like this would normally send stocks shooting higher, but the good jobs numbers instead raised investor fears that the FED might begin tapering the $85 billion it is injecting into mortgages and treasuries sooner than expected.
The news also sent Treasury prices tumbling as investors scrambled out of fixed income. So far this selloff has somewhat shunned equities as an alternate investment, while gold has seen a run to the highest levels since June 19, the day before an 80 point drop, but this pullback could change both of these trends.
Despite some earnings disappointments in the past week, the un-weighted operating earnings of the current constituents is still on track to set a quarterly and trailing twelve month earnings record. These beats are not as great as reported earlier due to two errors found in the collected data nearly a week after it was reported.
Major Stock Market Indexes
The major indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000 all continued to fall after turning lower at or above previous resistance two weeks earlier. For the second straight week all five of the indexes slipped lower.
The NASDAQ was the only index with two up days while the others only managed one. The NASDAQ looked to be ready to push above the previous 52 week high early in the week before slipping the final three trading days. The NASDAQ broke below its 13 EMA to about midway to the 50 EMA on Thursday, but it traded fairly flatly Friday and finished the session only slightly lower. Thursday’s fall was largely due to the highly weighted Cisco (CSCO) stock price drop after reporting very good earnings, but announcing it would cut as many as 4000 of its employees.
All but the Dow Jones held near or above their 50 EMA during the week, with the Dow slipping and closing fairly far below its 50 EMA during the past two days. The S&P 500 also slipped through and closed below its 50 EMA the past two days, but has remained relatively close to this average. The New York Stock Exchange slid slightly through the 50 EMA during the past two days, but finished both sessions above it while the Russell 2000 fell to and rebounded higher off the 50 EMA Friday.
All the indexes saw volumes spike higher on Thursday, but most of the volume data that is available closely mimics that seen on the S&P 500 discussed earlier, so the selloff did not appear to have investor support across the other indexes either.
The drop seen Thursday was mostly due to a gap lower at the open, although the Dow Jones and S&P 500 indexes hide much this gap by reporting discordant opens. Based on the price of the S&P 500 and Dow a minute after the open and the opening price of the others, the indexes all traded somewhat lower from these opens, but the drop was less than a half percent. All finished Friday lower, but all finished that session less than a half percent lower on that day too.
All but the NASDAQ have reached fully oversold conditions while the Dow is deeply oversold.
Some of the index charts do not appear as bullish as they did earlier, but are maintaining within bullish trends. Most stocks and indexes are fully or deeply oversold. Many appear to have reached and possibly rebounded off likely support levels. It seems fairly likely the indexes could begin to rebound soon.
There continues to be many predictions of a large drop in stock prices, but many that are predicting this drop still believe stocks will rebound to finish the year higher than the previous high. Some of the reasons that they cite include: earnings have been at record levels since 2010 and look likely to continue to climb, economic conditions are improving, the gold bubble will likely continue to deflate with a great deal of these investments being moved into equities, and a large amount of the investments moving out of fixed income (US Treasuries) will move into equities.
US Treasury Charts
The price on the 20 year US Treasury Note inched higher Monday before slipping to close lower. It gapped considerably lower at the open Tuesday trading rather flatly through Wednesday’s close that inched slightly higher. The 20 year price they ruptured the previous minor support level in a steep drop Thursday that continued to fall still deeper Friday. The steep fall during the past week makes it appear this chart could re-establish the deeper slope it was falling in earlier using the old upper trend line as the new lower trend line. It is still above that trend line so it looks likely it could drop still deeper before finding a minor support level. This chart again looks very bearish. There continues to be considerable downside potential as meaningful support will not likely be found until it falls quite a bit deeper than it has to this point.
The 10 year US Treasury Note interest rate slipped deeper Monday before rebounding to finish the session higher and slightly above the 13 EMA. Tuesday gapped higher at the open and continued to climb to finish near the intraday high. Wednesday traded in a very narrow range and finished the session slightly lower. Thursday saw the interest rate race higher through previous resistance with this steep run up continuing into Friday. It appears the 10 year is re-establishing the slope it was running higher in also, with the new upper trend line just slightly higher than the old lower trend line. It is currently resting below this trend line, so if seems possible it could continue higher before hitting resistance. This chart continues to look bullish.
The treasury charts maintained within patterns that are generally bullish for stocks.
S&P 500 Constituent Charts
Even though the index has again fallen significantly, overall the S&P 500 constituent charts maintained bullish postures.
Not all the constituents fell into the pullback this past week, some even pushed to new 52 week highs into the large drop Thursday. Many of the constituent stocks that have retreated are deeply oversold. Many are also resting on or near likely support levels.
Although a few of the constituents appear they could possibly be establishing downtrends, most have maintained within uptrends.
Some charts have taken a much more bullish stance in the two weeks since the pullback began on the index. It appears that a couple have reversed long falls and established uptrends during the past two weeks.
Most of the indicator stocks fell steeply beginning early this past week. Although most finished Friday lower most also rebounded fairly strongly at likely support into the close. It is too early to tell for sure, but it seems possible these stocks made the turn higher. Several of the indicator stocks did not turn lower in this pullback as they did in the earlier significant pullback, but instead maintained recently developed trends higher.
Based on data downloaded after Friday’s close it shows that none of the constituents finished the session at 52 week lows, while seven are less than 1%, 11 less than 3%, 24 less than 5% and 52 less than 10% from 52 week lows. Conversely none of the constituents finished at 52 week highs, while six finished less than 1%, 64 less than 3%, 161 less than 5%, and 343 less than 10% from 52 week highs.
Based on data downloaded after the close on August 2, the highest closing price on the index before the pullback, compared to the data after Friday’s close: There were 119 constituents that reached a new 52 week high and 11 constituents that fell to new 52 week lows during the two week fall in the index. Cabot Oil & Gas Corp. (COG) stock split two for one during this period and the comparison data was adjusted to reflect this split.
The majorities of constituent stocks are in or near oversold conditions with many deeply oversold and the pullback has taken many of the constituents to likely support levels. It seems possible stocks could begin to rebound.
The -2% L, 100 L, +9 Day and 90E indicators are currently active. The +2% L indicator expired with Friday’s close. See a more detailed description of the indicators developed through research here.
Three indicators have recently expired, others will be expiring in the coming weeks and it seems possible others could toggle off soon. Generally a decrease in active indicators shows a decreasing chance of volatility. Periods of low volatility are generally bullish.
The -2% L indicator did not provide a correct indication in the past week. The -2% L indicator will toggle off with the 100 L, provided there are no volatile moves (that of 2% or greater during a session) prior to the 100 L deactivating.
The +2% L indicator did not provide a correct indication in the past week. This indicator expired after Friday’s close without providing a correct indication. This expiration leaves two consecutive 2% drops without offsets.
With chances of about ten to one against it, there was a second significant pullback seen within the 100 L resistance level.
The +9 day indicator that became active on June 18, 2013 has performed as follows to this point in the format: highest close / lowest close / last close.
+3.50% / -4.77% / +0.24%
A 90 E indicator is currently active. The 90 E indicator will remain active seven more trading days. The expiration periods of 90 day indicators have exhibited many unusual market conditions in the past, with most occurrences of this expiration covered in past articles being bearish. However; not all expiration periods are bearish, some have been very bullish. In this instance it seems possible the expiration period could be bullish.
The ten day indicator is very near a high state, but has not yet toggled on. Although not a certainty, it seems possible this indicator could toggle on soon. Even if it fails to toggle on, near toggles of this indicator are also often bullish. The last time this indicator activated was June 20, 2013 and it finished 2.75% higher, but if it had toggled on two days later it would have finished 5.04% higher. That 5% move higher during the ten trading day period was the only move of these proportions seen during any ten trading day period this year. The last ten day period with a 5% or greater move higher prior to that was seen June 5 through June 19, 2012 when the index moved 5.65% higher, also two trading days after a ten day indicator became active on June 1, 2012 that finished 5.07% higher. June 4, 2012 also finished at 5.21% higher.
Although originally developed to indicate a 5% or greater move, this indicator is considered successful if it indicates a move of 3% or greater higher. A move of 5% or greater higher is not a certainty when this indicator toggles on, but the chances of a move of this proportions are very high. This indicator fails to indicate moves of 5% or greater more often that it succeeds, but 5% moves in ten trading days are only seen in about 2% of all ten trading day periods. The indicator has failed to indicate at least a 2% move higher three times since it was developed, with all three being miserable failures, seeing the index fall over 5% during the ten day period. Even so, each time the index rebounded to provide gains within the expected ranges of this indicator a relatively short time after the ten day period expired.
Although it again seemed unlikely, the S&P 500 has seen a second significant pullback within the 100 L resistance level. There appeared to be about a 10% chance of a pullback of this proportion within the upper half of this resistance in the 100 L. In this case the failure appears to be news related, although it was caused by good economic news and not bad.
It seems possible the index could be entering the first of two midrange resistance levels fairly soon. It appears that this resistance level might cause a continued slowing in the ascent of the index, but the appearance of a second significant pullback within the 100 L could reduce the chances that this resistance will be felt.
The S&P 500 has dropped to a significant level, and although it seems likely a great deal of the investments exiting US Treasuries at the current time will find their way into equities during this drop, it is not possible to foretell with any certainty how investors will react in the short term. Just the same the drop is probably an opportunity to add.
Volume levels seen in this pullback do not appear to support the price direction.
It still seems likely the index could enter into the first midrange resistance level soon. The first midrange resistance level will likely be found between 1735 and 1745 (possibly to 1750). The data suggests that the resistance at this level might slow the ascent of the index, but this resistance could have been reduced with the second significant pullback within the 100 L and another large selloff in US Treasuries that could fuel a rally past this resistance.
The second midrange resistance level will likely be seen between 1760 and 1770. It continues to seem possible the second resistance level could hold significant resistance. Not all data needed is available to fully investigate this resistance level at this time; any projections made prior to this data being complete are preliminary and could change over time.
Midrange resistance levels are the most likely areas that resistance will be met, but since there is no established resistance at these levels, there is no certainty that these levels will hold resistance. It is also possible resistances could be met in areas that appeared to have a low likelihood of producing resistance.
Several indicators have recently expired and others will be expiring during the coming weeks. A decrease in active indicators is generally bullish.
Timing patterns suggest stocks could continue to rebound due to large selloffs in US Treasuries. This rebound in stock prices could be very large if the drop in treasury prices continues. Treasuries fell through the last meaningful support earlier leaving only minor support levels and a large gap lower before meaningful support would be found again. It seems fairly likely the minor support levels that hold in drops could fail in a retest. The charts seem to indicate the drop in Treasury prices could be returning to the relatively steep fall they were in earlier.
There continues to be many reasons to be bullish at the current time. Any pullbacks in stock prices seen along the way are probably a good opportunity to add.
I read an article in the past week that claimed funds are selling equities and buying Treasury bonds. The article cited the large increase in interest rates and a move into the relative “safety” of Treasuries as the reason for this move. The interest rate on Treasuries moves inversely with the price, the increase in rates was caused by a large decrease in the price of Treasuries, which shows there was a very large move out of Treasuries that caused the price to tank. This price dropped through yet another minor support level on 20 year notes in this fall and as a result the 20 year Treasury chart again has taken on a very bearish stance. Meanwhile the run up in the 10 year interest rate broke strongly through resistance and it makes that chart continue to look very bullish. Both of these charts also seem to returning to steeper slopes.
There very well might be some funds selling equities and buying Treasury bonds, but unless it is into short term notes that still have relatively low interest rates, it is against a very large flow of sellers in Treasuries. This selloff is likely to continue until the price falls much deeper. As I have shown in past articles an interest rate below 4% on the 10 year note was uncommon until 2008, and it averages around 7%. History shows the bulk of the move out of Treasuries seen to this point will likely eventually make its way into securities, and the recent pullback could draw a large inflow when it changes direction. Long term Treasuries still look very risky with little upside potential and a large downside potential while stocks continue to look to have much greater upside potential.
Again, if you feel uncomfortable in securities and are looking for a safe haven in bonds, add them in a short term stable value fund. These funds hold the notes to maturity, and replace them with new issues as they cash in the old bonds. If the new bonds are issued at a higher rate, the fund will begin to pay the higher rates without the downside price risk seen in longer term bonds.
One of the reasons for the downward spiral in stock and Treasury prices is an improving jobs picture, generally this is good news for stocks, but instead it has struck fear into investors as it is likely the FED will begin paring back on the $85 billion a month it has been dumping into mortgage loans. There is evidence that being accepted for a mortgages is becoming easier as the interest rates increase, probably due to the recent spike in interest rates which is increasing interest in the secondary mortgage market. By the time the FED completely stops this injection, it probably won’t be needed at all.
Historically extended periods of low interest rates have proven to slow economic expansions. There are many examples, including the historically slow rebound in the US to this point, but one of the most glaring examples is Japan’s extended period of low interest rates. During this time they fell from the country with the world’s second largest economy to third, while watching many countries with much higher interest rates narrow their lead or surpass them. At the same time those with larger economies and higher rates widened their lead.
Japan’s GDP had been steadily gaining on the US prior to the 1990 collapse and was slightly more than half of the US GDP in 1993 (the first year data was available in an all GDP format), but had fallen to about a third of the US GDP by 2012. Australia had less than an eighth of Japan’s GDP in 1993 but sliced the lead to less than a quarter by 2012. Brazil went from less than a sixth in 1993 to more than a third in 2012. In fact most of the top 50 world economies outside of the Euro Zone halved the GDP lead Japan held on them in 1993 by 2012. Even with the economic woes Europe has seen since 2008, many of the Euro Zone’s economies have gained on Japan during the 1993 to 2012 timeframe.
Low interest rates are beneficial for short durations, but detrimental in long durations. The reason is your robbing Peter to pay Paul. The low rates reduce income on savings or other financial investments and in turn reduce economic inflow from these incomes. The low rates basically steal form one part of the economy to pay for low interest rates on loans to jump start the economy.
It works well only if the duration is short, but as the low rates linger, many things begin to happen that stunt growth. Domestic savings begin to dwindle and financial investments begin to flow into foreign bank accounts and investments, or to other investments that are not economically beneficial like precious metals. Banks tighten lending, as the low rates have crippled the mortgage aftermarket. At this point the funds that were being stolen from Peter are mostly gone, now Paul is being paid pretty much straight out of the economy while Peter has moved much of his money into investments that are detrimental to the economy. Growth suffers due to the poor economic investment choices Peter has made along with the drag of paying for the low rates for Paul out of the economy.
Many of these sources of information were used in this article.
Subscribe to receive Email alerts for new articles as they are published near the top or bottom of this page.
Have a great day trading,
All of my past articles can be accessed here.
Disclosure: I have no investments in CSCO or COG. I am currently about 84% invested long in stocks in my trading accounts. The increase in my investment level over the past week was due to the purchase of two issues with the cost of these purchases partially offset by the proceeds from dividend payments. I consider myself oversold at the current time; however I have and will continue to sell stocks that reach long or short term targets. I will also continue to add stocks I feel are at a great value mainly through day and short term buy orders. I will receive dividend payments from five issues in the coming week and eight in the following week. If I make no further investment changes during this timeframe these dividend payments will not change my investment level.
Disclaimer: What I provide in the Stock Market Preview is my perception of the current conditions and what I think is the most probable outcome based on the current conditions, the data I have collected and the extensive research I have done into this data along with other variables. It is intended to provoke thought of the possible market direction in my readers, not foretell the future. I do not claim to know what the stock market will do. If the stock market performs as I expect, it only means I am applying the stock market history to the current conditions correctly. My perception of the data is not always correct.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.