The S&P 500 fell in the first two sessions before rebounding in the final three to post a 0.75% increase for the week. The S&P 500 closed Friday at 1703.20 and it was the first close above 1700 since Sept 23. The index has risen in 116 of 197 sessions this year.
Tuesday’s drop brought the downturn to a significant level as the S&P 500 finished the session 4.06% below the Sept 18 all-time highest close during a span that saw the index close lower in 11 of 14 sessions. Thursday’s rebound reached volatile levels as the index pushed 2.18% higher and it was the first move of 2% or greater higher since the Jan 2 increase of 2.54%. This was only the fourth volatile move on the index this year with the other two being a 2.50% drop on June 20 and a 2.30% drop on April 15.
Volume began to rebound somewhat into the early rebound, with the highest volume of the week seen in the initial push higher on Wednesday and the lowest in Monday’s drop. Friday’s volume remained rather light, but investors likely remained cautious about going long into the weekend as negotiations over the debt ceiling were expected to continue and may have feared that these negotiations might break down before Monday’s open. At the same time investors covered shorts, fearing these negotiations could bring a resolution before Monday’s open. This short covering undoubtedly helped to push stocks higher. Even though Friday’s volume was low, it was still 9.94% higher than Monday’s anemic levels.
As expected last week the 13 DMA for volume on the S&P 500 moved much lower, dropping 6.98% below the previous Friday. When considering the volumes of the three days in the current rebound against the previous ten, these three days average volume is 6.23% greater than the average of the previous ten. It seems fairly likely that if this rebound continues, the 13 DMA will likely begin to increase. The increase in volumes would indicate the return of buyers. It also points to a likely turning point higher.
Major Stock Market Indexes
The major indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000 showed some bearish signals early in the past week’s trading before beginning very bullish rebounds Thursday.
The NASDAQ began the week with its first three day decline since a four day decline finished on Aug 19 dropping 3.43% over the three days. It slipped below and closed below the 13 EMA on Tuesday for the first time since Aug 30 and fell and closed below the 50 EMA for the first time since June 25 on Wednesday. It has rebounded very bullishly since, pushing back above both the 13 EMA and 50 EMA on Thursday and continued higher on Friday posting a 3.10% gain during the two days. The three day selloff was largely due to profit taking on some of the high flying stocks on the index and as these stocks began to rebound from this large selloff, so did the NASDAQ.
The Russell 2000 also slipped lower in the first three sessions as it slipped below and closed below the 13 EMA on Monday and closed below the 50 EMA on Tuesday and again on Wednesday. It rebounded above both levels on Thursday and continued to push strongly higher on Friday to finish the week a little over three points from a new all-time high.
The Dow Jones broke below the lower trend line of its uptrend it had established in the three previous lows beginning with the April 19 low, and fell within 0.40 of the previous downfall’s lowest close on August 27 Tuesday before pushing bullishly higher the next three days. The Dow broke and closed above the 13 EMA for the first time since Sept 23 Thursday and closed back above the 50 EMA for the first time since Sept 27 Friday.
The S&P 500 and New York Stock Exchange both fell and closed below the 50 EMA Tuesday and remained below this level even though each closed a little higher Wednesday. Both pushed bullishly higher Thursday finishing that session back above both the 13 EMA and 50 EMA and each index continued higher on Friday.
The rebound on the indexes was very steep showing investors have great faith that Congress will come to an agreement on the debt ceiling before a default on debt is made. Recently the news out of Washington has been fairly positive that an agreement is forth coming. All of the major players appear to be in agreement that a default is not in our nation’s best interest.
Investors could continue to remain cautious into the deadline for raising the debt ceiling, although many of those that are showing caution are now on the short side of these investments. However the majority of stocks have become fully oversold and a rebound looks possible in the week ahead.
US Treasury Charts
The price on the 20 year US Treasury Note price dipped a little more during the week. This chart continues to show some bullishness; however it also continues to show signs of failure. The 13 EMA which had been rebounding nearly flat lined as it reached the 50 EMA and then failed to cross above it. It has since begun to round lower again. Although the closing price has remained relatively flat for the week, intraday lows are falling much deeper than they had been earlier and it has seen lower closes. While a couple recent closes were slightly higher than those just previous them, these highs are far from the resistance that turned prices lower. Although the 20 year is falling towards oversold as it trades within a fairly thin bandwidth, it looks like many of those that had bought earlier are standing pat for the moment, while few are coming on board. A continued rebound in stocks could change that posture. Upside in Treasuries looks limited and a full retest of previous support is prone to failure. It still seems likely meaningful support will not be found until Treasuries drop considerably lower. This chart continues to look somewhat bullish, but this bullish appearance is beginning to fade as the chart is showing bearish failures. Although the 20 year might blip higher first, the stall pattern looks close to failure.
The 10 year US Treasury Note interest rate chart is beginning to show some bullishness again. The 10 year rate has finished higher in four of the past six sessions and is beginning to cup higher, continuing the appearance of a rounding bottom. It broke long strings of closes below the 13 EMA as it pushed and closed above it on Thursday. Thursday’s run also closed at the 50 EMA although Friday finished slightly below it. The 13 EMA is beginning to round up towards the 50 EMA. Although this chart has taken a somewhat bearish appearance, it continues to hold within bullish trends and is showing signs of a bullish rebound. It seems possible the 10 year rate could continue to move higher in the week ahead.
The apparent bullishness in the US Treasury price charts is generally somewhat bearish for stocks; however it continues to seem fairly likely this bullishness in Treasury prices could be temporary.
Gold rebounded Monday, but fell during the remainder of the week, dropping to and through support at about 1280 as the week progressed. Although this support may not have failed yet, it appears to be weakening and it seems probably it could break fairly soon. The New York close Friday of 1273.20 was lower than the previous week’s close of 1311.20. Friday’s London PM Fix was 1265.
S&P 500 Constituent Charts
Although many of the constituents that had fallen to or near long term support levels and rebounded off these support levels the previous Friday saw this rebound fail early in the past week, most fell back to this support and rebounded higher into the end of the week. This gives a double bottom pattern and the stronger rebound off this second low makes it look more likely to continue.
Not all fell back to this support in the early downturn, many of these rebounds saw a pullback, but it stopped well above previous support and continued higher into the end of the week. Others continued higher into the overall market downturn.
Many of the stocks that had not yet rebounded in the previous week appeared to have rebounded off support levels during the past week.
Many others that began rebounds off support earlier have continued to push higher and many of these stocks are reaching overbought. These stocks were rebounding against the tide of the overall market. It seems likely some could continue this trend and slip lower into the overall market upturn, but some look like they could begin to hold in or near overbought conditions for the time being and continue higher.
The four points above give the appearance that stocks have maintained the staggering pattern through this retreat.
Some of the constituents that were in downtrends saw a rebound in the past week that not only appears to have broken these downtrends, but also appears to have established uptrends.
The constituents continue to break above long term resistance levels. Specifically resistance levels that have held up as resistance many times for ten or more years and are clearly visible in the charts. There are quite a few more that are nearing these types of resistance levels. Many of these constituents have seen long runs higher in past breaks of these resistances. Continued increases in the numbers that break these resistances would be quite bullish.
Most of the constituents in wedging patterns against resistance broke these wedges higher during the past week, many of these moved significantly higher since Wednesday. Stocks generally continue higher after breaking resistance. It looks like new batches of wedges are forming so these resistance breaks could continue for some time.
Some of the constituents have already reached overbought conditions, but many of these began rebounds much earlier or have maintained in or near these levels recently. Most constituents are still oversold. Provided a reversal in progress on the debt negations is not seen, it seems likely the run higher could continue in the week ahead.
The +9 Day, 90 E, -2% L, +2% L, 100 L, +/(-)90 D, and +10 D indicators are currently active. See a more detailed description of the indicators developed through research here.
Four indicators became active in the past week and generally an increase in active indicators shows an increasing chance of volatility. The index reached volatile levels with a rebound of 2% or greater Thursday. It seemed possible these indicators could be bullish earlier. Current events could increase chances of volatility, however most other indicators suggest that volatility could remain calm.
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.
+4.46% / -4.77% / +3.11%
The +9 day indicator will expire in nine trading days.
Due to the approaching expiration date of the +9 day indicator, a 90 day indicator expiration period (90 E) indicator became active on Monday. A 90 E indicator is active for 27 trading days, encompassing the expiration date and the 13 trading days before and 13 trading days after the expiration date (also noted as the expiration date +/-13). The expiration periods covered in many of the past articles were bearish, but this indicator is not always bearish, it has also been very bullish in the past.
One of the traits of this indicator is that it very often points to significant direction changes on the S&P 500. These direction changes are well documented in past articles during occurrences of this indicator. The last time this indicator was active it remained active for an extended period due to two 90 day indicator expiration periods overlapping. During that 37 trading day period the S&P 500 had two significant direction changes, one during each of the 90 day indicator’s expiration periods. The first was from the Aug 2 high that dropped 4.63% lower into the Aug 27 low and the other from the Aug 27 low that pushed 5.83% higher into the Sept 18 high.
One of the most notable direction changes was the turn higher from the July 2, 2010 low and is covered in some of the very first articles of this series. This low occurred on the expiration date of a 90 D indicator, or dead center of the 90 E range. The index had seen 11 volatile market moves in the 15.99% fall from the April 23 high. The volatility wasn’t over after the turn higher, there were eight in the rebound but six of them were 2% or greater moves higher. The index recovered from the significant drop in just over four months, topping the April 23 high on Nov 4. It finished the year 18.69% higher than the July 2 low. As is the case with several of the turning points higher seen during the 90 E indicator, after this rebound began the index has not seen a close near this low again. The closest it’s been in a retreat since was about a month later during an Aug 26 low that was about 25 points higher.
The current rebound from the lowest close seen in the pullback on Tuesday into Friday’s close is 2.88% higher and has not yet reached a significant level. As long as a breakdown in talks over the debt ceiling does not happen, it seems relatively likely the index could recover from this significant drop during this rebound. It seems possible a rebound from this level could be the last time it sees this level for many years too.
The activation of the 90 E also activated both the +2% L and -2% L indicators due to past bullish and bearish instances during this indicators presence. Despite current events, overall the indicators suggest that the expiration period could contain low volatility therefore the indicators began in a low (L) likelihood state.
During the past week the +2% L indicator had a correct indication as the S&P 500 moved 2.18% higher Thursday. The market acted very bullishly to news that a possible compromise to extend the debt ceiling and avert a possible debt default might be close and as a result this rebound reached volatile levels.
During the past week the -2% L indicator did not have a correct indication. The presence of a 2% or greater move higher on the S&P 500 during a session increased the potential for an offsetting move; therefore this indicator went into a high (H) state at Thursday’s close. This indicator will remain in a high state for 10 trading days unless there are additional volatile moves, and if there are none, it will then return to a low state for 20 trading days or the remaining portion of 30 trading day period that this indicator is most likely to provide an offset.
Even though this indicator went into a high state, it seems fairly likely it will expire without incidence for several reasons. The two main reasons are this bullish rebound was within the push higher from a significant pullback. These rebounds are generally bullish indications that investors’ worries have eased enough for stocks to continue higher and these moves usually continue higher without seeing an offsetting move lower. The second is there were two outstanding 2% drops that did not have an offsetting 2% increase one on April 15 and the other on June 20. This rebound serves as an offset to these earlier uncovered drops and offsetting moves higher under similar market conditions often continue without reprisal. Some of the other reasons are included in discussions about the new 90 D indicator below.
The 100 L indicator remains active as the index has fallen back within this resistance level. The resistance seen within this level has been much stiffer than the data suggested it might be as the S&P 500 fell to a significant level early in the week. This was the third drop to a significant level within this resistance with each of these pullbacks being aided by news that increased investor anxieties. The data appeared to suggest this resistance might not hold significant resistance as the index neared it and it seems possible had this news not occurred these early indications might have been correct.
It seemed very likely a pullback much like the first seen within the 100 L would probably be seen within the first midrange resistance, but since this pullback occurred earlier than expected, it seems fairly likely the potential resistance within the first midrange level may have been reduced drastically. It seems possible it could cause little more than a slowing of the climb, if it is felt at all. It also seems likely that the news events that had kept the index mostly within the boundaries of 100 L will probably not be issues when this resistance is met, and this could help to fuel a rally past this resistance as investors breathe a sigh of relief.
The upper resistance barrier of the 100 L seen at 1725 has been broken in the run to all-time highs. This initial break should soften the resistance at the upper boundary of this resistance level in a retest.
Normal record keeping practices would have accredit the current pullback to the first midrange resistance; however due to the closeness of the pullback to the 100 L and short time duration spent above this resistance level it appeared this could be in error. Further research into similar resistance levels and pullbacks from these resistances that were not in conflict with higher resistance levels tends to agree that accrediting this pullback to the upper resistance level would be an error. This research is ongoing, but will likely lead to modifications of the normal record keeping practices for conflicting resistance levels. These refinements will not likely be made until the outcome is clear within these resistance levels as this data will also be considered in these refinements.
A new 90 D indicator became active as a volume stringer that controls this indicator was broken Tuesday after eleven days. The last trading day this stringer remained intact is used as the starting date and as a basis of comparison for the following 90 trading days. Hence this 90 D indicator became activate on Monday Oct 7, 2013. It has performed as follows to this point in the format: highest close / lowest close / last close.
+1.62% / -1.23% / +1.62%
The current indications would suggest that this indicator could begin very bullishly provided news events do not thwart its progress. These indicators also suggest that this 90 day trading period could end with a pullback; although it is not likely it will erase the gains seen the S&P 500 has already seen during the 90 D indicator’s tenure. It is also possible this pullback might not occur until after this indicator has expired. Therefore the 90 D has been given a +/(-) prefix, indicating that it is likely to begin higher first, but see a pullback late during its active period.
These indicators seem to be supported by the reasons mentioned in discussions about the -2% H above, but there are other reasons to believe stocks could continue higher.
Earnings have continued to be strong in most stocks. The current constituents of the S&P 500 reported another quarterly earnings record in the second quarter. They also reported the tenth straight quarterly increase in the record trailing twelve months operating earnings. The second quarter’s record TTM earnings were 60.09% higher than the first TTM earnings record in this string reported in the first quarter of 2011.
It seems fairly likely that the third quarter’s earnings for the constituents could surpass those of the second quarter by a fairly wide margin. It also seems fairly likely the fourth quarter’s earnings could surpass those reported in the third quarter.
Great earnings are not always enough to keep stocks moving higher. Investors can be fickle about earnings pulling the entire market down with one or two bad reports, while at the same time 70%, 80% or more of the constituents continue to report record earnings. The large pullbacks seen on the S&P 500 in 2010, 2011 and 2012 are a testament to this.
Growth percentages can also cloud the facts of earnings. Large growth rates are not sustainable, but falling growth rates that still provide larger increases in earnings on a dollar to dollar basis often are. For instance there is much talk of the growth rate of the US GDP. Many point to the 2% growth rate and call it anemic compared to growth rates in the past of 4%. Let’s compare this growth rate to some in the past with much higher growth rates.
The US GDP as reported by Bankrate.com for this week was $16.661 Trillion. A 4% growth rate would provide an increase to the GDP more than the total US GDP for any year prior to 1964. At a 2% growth rate, the GDP will add more in a year than it did during the entire decade beginning in 1960, and that decade saw yearly growth rates above 10% many times, although it averaged about 7%. It took until the first quarter of 2001 for the US GDP to reach $10 billion. During relatively smooth sailing in the markets and a growth rate above 4% the GDP increased about $4.7 Billion over the 12 year period in reaching this milestone. In the 12 years since it is over $6.6 billion higher, despite the two largest market crashes in the S&P 500’s since it was established in 1957.
The GDP growth rate has hovered near 2% since 2011, but as seen above it has pushed TTM earnings up 60% since the first quarter of 2011. Based on Robert Shiller’s data, earnings only increased by about 70% during the 60s. That increase was with a GDP growth rate that averaged above 7% for ten years.
Even though earnings growth was much smaller than seen now, the S&P 500 nearly doubled during the 60s. But it took a while for investors to warm up to these earnings increases, it seems possible investors might finally be in the warm up stage in today’s market. Even though earnings increases might continue to be overlooked, more are taking notice that earnings are very good so it seems possible they won’t be.
We are nearing a time of year that is generally very bullish for stocks. Using the average daily increase chart published in an earlier article, it shows the S&P500 has averaged over 40% of all the gains seen on the S&P 500 during its existence, based on a period beginning now until the end of the year. Although not all years have what has become to be known as the Santa Claus Rally, most do. It is often prudent to invest the way things go most of the time.
There is a large bank of cash on the sidelines. My research suggests there is perhaps near a trillion dollars in cash or liquid investments. Although it appears many holding this cash continue to wait for a pullback of 10% or greater to invest, if it becomes obvious this pullback is not likely to occur much of this cash could begin to funnel into equities without this pullback. The rally normally seen into the end of the year could begin to draw this cash in.
The steep fall early in the week toggled the ten day indicator on. The ensuing rebound has taken this indicator back to a quiescent state, providing a clean toggle. Due to overlooking this indicator in the previous article and a toggle that happened without prior coverage, its progress will not be covered, although I do feel it is relevant to mention that this indicator is active.
Congress appears ready to act in our nation’s best interest and make a deal to avert a debt default. Proved there is no backtracking on the progress made to this point, it seems possible stocks could continue to rally.
Although recent research makes it seem likely that a rebound will carry the index back above the 100 L resistance level, the data also made crediting the recent significant pullback to the first midrange resistance appear to be an error. The 100 L was reactivated and as a result of continued research will be credited with a third significant pullback.
The 100 L resistance has proven to be much tougher than the data suggested it might be. Much of this added resistance appears to have been news related, including the news that Congress might allow a debt default which led to the third significant pullback. The unpredictability of this resistance level is reason to exercise some continued caution; however it seems possible the news that led to the latest fall in prices on the index could come to a conclusion soon. Provided a reversal in previous negotiations is not seen, or another ugly news story does not prop up, it seems possible this resistance level could finally give way.
Volume levels again began to rebound with stock prices. Although it is too early to tell for certain, volume levels that return to more normal levels after a pullback are often an indication that a bottom has been reached. Other indications also seem to point to a continued rebound.
At some point the cash on the sidelines will move someplace, but at the moment it does not appear to be into stocks. This could change with a resolution to the debt ceiling. If the Santa Claus develops as it normally does, it could also help to draw this cash in.
Four indicators became active on Monday. An increase in active indicators generally shows an increasing chance of volatility with times of increased volatility generally bearish. The increase in indicators was met with a volatile move higher on Thursday. This volatile move higher in the early rebound off lows is often bullish. Most indicators continue to suggest that volatility could remain low which is also generally bullish. It continues to seem possible these new indicators maybe bullish.
The first of two likely midrange resistance levels 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. Although the recent rebound in treasury prices looks temporary, it is currently somewhat bearish on this resistance level.
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.
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.
Many of these sources of information were used in this article.
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All of my past articles can be accessed here.
Disclosure: I am currently about 88% invested long in stocks in my trading accounts. Although there was no change in my investment level during the past week I purchased one issue with the cost of this purchase partial offset by the sale of one issue and dividend payments. I consider myself slightly 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 through a variety of buy orders. I will receive dividend payments from 12 issues in the coming week and six in the following week. If I make no further investment changes during this timeframe these dividend payments will leave my investment level unchanged.
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.