The S&P 500 fell in four of five sessions this past week as the approaching deadline to raise the debt ceiling tapered the stock rally. As a result the index finished the week 1.06% lower. The index has slipped lower in 6 of the past 7 sessions, but has risen in 111 of 187 sessions this year.
The pullback did not only drop stock prices, volume also fell off during the pullback. All five sessions traded with lower volumes than the 13 DMA. Even though the 13 DMA continued to increase into Wednesday’s close despite the decreasing volumes of the first three sessions, the weak volumes caught up with it and the 13 DMA slipped just over 2% lower from the previous Friday’s close.
Major Stock Market Indexes
The major indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000 are showing some mixed signals.
The duration of the falls seen on the Dow Jones, New York Stock Exchange and S&P 500 are somewhat bearish. Generally bullish runs on the indexes limit pullbacks to one to three sessions, while all three of these indexes saw prices fall in five consecutive sessions and six of the past seven.
Despite the changes to the Dow Jones this week where Visa Inc. (V), Goldman Sachs Group Inc. (GS) and Nike, Inc. (NKE) replaced Hewlett-Packard Co. (HPQ), Bank of America Corp. (BAC) and Alcoa Inc. (AA) the Dow Jones continued to show the most bearish chart in pullbacks as it fell through the 13 EMA to the 50 EMA. It’s finished four straight sessions below the 13 EMA and broke below the 50 EMA Friday before rebounding back above it.
Even with the bearish signals seen on the Dow Jones, New York Stock Exchange and S&P 500 during the week, most indications remain bullish.
The S&P 500 and New York Stock Exchange have maintained above or close to the 13 EMA during the retreat, although the S&P 500 finished Friday slightly below this level. All three of these index charts give the appearance they could be beginning to round up from the drop. If they do round higher here, the retreat would give a higher low to complement the higher high seen last week.
The NASDAQ and Russell 2000 remained very near highs during the past week, in fact the Russell finished Thursday at a new all-time high. Both maintained within bullish pullback durations, the longest pullback on the Russell was three days, while the NASDAQ’s longest was two days. Both also remain in runs above their 13 EMA, the NASDAQ has finished the last 19 sessions above this level while the Russell has a 17 session run going.
The pullbacks seen during the past week have relieved the extreme overbought conditions seen on the indexes and in most stocks. Although the indexes have not fallen to fully oversold conditions many stocks have. Overall the pullback looks like a round of profit taking that stocks could rebound from and not a bearish divergence.
Investors could continue to remain cautious into the deadline for raising the debt ceiling. Even if the deadline passes without a resolution, stocks could still rebound, they did in the last two shutdowns. Drops to or near the 13 EMA are probably buying opportunities, although there is a fairly good chance that many of the indexes could turn higher above this level in this retreat. Patterns in stocks suggest that the indexes could rebound before becoming fully oversold, and could begin to hold in or near overbought conditions.
US Treasury Charts
The price on the 20 year US Treasury Note chart broke to a high higher than that seen in the previous cycle during the past week. The price has held above the 13 EMA for seven days and above the 50 EMA for four. The 13 EMA is curving back up towards the 50 EMA while the 50 EMA is beginning to flatten in its retreat. These are all bullish signals, but they are likely temporary.
The 20 year price has pushed up into what is likely to be a very strong resistance and has begun to bend back down from this resistance. The 20 year has also become fully overbought in this run. Therefore it seems fairly likely that the 20 year’s price could slip in the week ahead. A full retest of previous support is prone to failure and it still seems likely the drop in price could continue considerably lower. This chart is beginning to look somewhat bullish, but it seems possible this bullish appearance could be short lived.
The 10 year US Treasury Note interest rate continued to drop in the past week. The 10 year interest rate has fallen in 13 of the past 16 sessions. It has finished the last seven sessions below the 13 EMA and the past four below the 50 EMA. As a result the chart has taken on the most bearish appearance since the fall to the May 1 low. At the same time, it has reached a level that is likely to offer support and is deeply oversold indicating that 10 year Treasuries are fully overbought. This makes a selloff in 10 year notes likely, and since the rate moves opposite of the price, it doesn’t seem unlikely the 10 year rate could rebound in the week ahead. Although this chart has taken a somewhat bearish appearance, it continues to hold bullish trends.
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 slipped lower into Tuesday, but bounced higher Wednesday. It traded within a bandwidth from about 1316 to about 1343 for the remainder of the week. The New York close Friday of 1336.20 was higher than the previous week’s close of 1325.60. Unless gold sees a very strong rebound Monday, September will likely be the sixth month this year to close lower than it began based on the London PM Fix. This decrease would also break a two month string of increases.
S&P 500 Constituent Charts
We have seen a somewhat bearish pullback on the index, but overall the constituents’ charts continue to be bullish.
Although many of the constituents have taken pullbacks with the overall index, nearly all in bullish runs higher have held trend in this pullback. Most that have been riding the 13 EMA higher have maintained this posture.
Many that are wedging into resistance have maintained within these wedges. Some constituents broke wedges higher despite the pullback on the index this week and some of them moved substantially higher.
Most of the stocks that broke downtrends into the recent rebound have maintained either the basing patterns or established up trends that broke these downtrends.
Although the index gave some bearish signs, most of the constituent charts appear to be completing a normal round of profit taking with most continuing in very bullish patterns. Some constituents have continued in downtrends, but overall there are very few constituents showing bearish signs in their charts.
The pullback has taken many of the constituents into fully oversold conditions, while many others are near fully oversold. Many of those that have not fallen into oversold appear to be maintaining near overbought. Of course there are still some between these levels that could move in either direction, but it looks likely if these stocks were to continue lower most would reach fully oversold before mid-week. The degree that constituent stocks are currently oversold, and the short duration it would likely take to bring most of the constituents into deeply oversold conditions, makes it seem fairly likely the index could begin to rebound soon.
It still seems likely many of the constituents could maintain in or near overbought conditions and these numbers could increase later. Drops to the 13 EMA look like a potential buy signal on most stocks.
Indicators
The +9 Day indicator is currently active. The 100 L resistance was reactivated as a precautionary measure. See a more detailed description of the indicators developed through research here.
All but two indicators have expired over the past few weeks, and generally a decrease in active indicators shows a decreasing chance of volatility. Although the index has retreated in six of seven sessions since pushing to a record high, it still seems reasonably possible the index could continue to rebound very bullishly from this drawback.
The depth of the current pullback makes it seem possible the 100 L resistance may have been closed prematurely in this instance and therefore it has been reactivated as a precautionary measure. Although the criteria used for the decision to close this resistance in the proceeding week has worked well in the past, the pullback the index has taken since has brought it back within the lower half of the 100 L resistance level.
Due to the criteria used in this decision, the current pullback is credited to the midrange resistance likely to be found between 1735 and 1745 (possibly to 1750), but after looking the data over, crediting this pullback to that resistance could be an error.
The intraday high of 1729.84 seen on Sept 19 was closer to the 100 L resistance than the midrange resistance. Although the close of 1725.52 on Sept 18 that deactivated the 100 L was within 1% of the midrange resistance level criteria used, it was still much closer to the 100 L resistance level.
Failures and apparent failures of indicators are reason for further research to refine them, and this apparent failure has started that process. Therefore it is likely that additional criteria will be added in the future, at least in the case of resistance levels near the 100 L. Although this research is not complete, one of the additional criteria points to be added will likely be a three consecutive day close above the +25 points upper band of this resistance level.
At the same time, many of the resistance levels reacted earlier than expected as the index moved closer to and above a new all-time high. It could be this apparent error was not an error and this pullback was caused by the first midrange resistance.
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% / +2.42%
The +9 day indicator will expire in 24 trading days.
Current Cautions
Although recent research makes it seem likely that a rebound will carry the index back above the 100 L resistance level, the data made crediting this pullback to the first midrange resistance look like an error. Therefore 100 L was reactivated as a precautionary measure.
Although most indications seem to suggest that stocks would rebound, the 100 L resistance has proven to be much tougher than the data suggested it would be. Even though much of this added resistance appears to have been news related, including the current pullback, the unpredictability of this resistance level is reason to exercise some caution.
Volume levels again slaked into the recent pullback, with all five trading days in the past week finishing below the 13 EMA. This lower volume caused a 2% drop in the 13 EMA from the previous week. The pullback into weakening volume again appears to show a lack of buyers and not so much an increase in selling pressure. This lack of buyers was probably due to uneasiness over a possible government shutdown next week.
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.
Several indicators have recently expired and others will be expiring during the coming weeks. A decrease in active indicators is generally 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 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.
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.
Comments:
A government shutdown looms on Oct 1 if lawmakers fail to increase the debt ceiling before that time. If the government shuts down, all but essential services will be suspended. As the deadline approaches the stock market appeared somewhat antsy this week, as gains seen early in trading sessions faded late in the trading day and were replaced by losses into the close of many sessions.
The last time a government shutdown happened was during a budget showdown between Democratic President Bill Clinton and Republican Speaker of the House Newt Gingrich. That battle resulted in two shutdowns, one from Nov 14, 1995 to Nov 19 1995 and the other from Dec 16, 1995 to Jan 6, 1996.
Although stock prices slipped leading into these two shutdowns, overall they finished higher than when they began the shutdowns. The first shutdown occurred just after the S&P 500 had finished at a new all-time high on Nov 9, 1995 of 593.26, but then slipped from that high into the first day of the shutdown on Nov 14 to finish that session at 589.29. It began a rebound that finish Nov 17, 1995, the last trading day before the first shutdown ended, at a new all-time high of 600.07.
Prior to the second shutdown, the S&P 500 again traded lower from an all-time high close of 621.69 on Dec 13, 1995 into the first session after the shutdown began on Dec. 18, 1995 that finished at 606.81. It ran to a high just short of an all-time high finishing Jan 3, 1996 at 621.32 before slipping in the last two sessions prior to the shutdown ending, finishing Jan 5, 1996 with a close of 616.71 and still a fair amount higher than the Nov 9 record close.
Although the index continued in a minor selloff after the dust settled and a new budget was signed that lasted until hitting a low of 598.48 on Jan 10, the index ran 10.52% higher from that low during the next month, finishing Feb 12 at a new all-time high of 661.45.
If the government is allowed to shut down by Congress, taxpayers should sue for a refund of taxes during the shutdown period. We are not expected to pay for services that are not provided during business shutdowns. Taxes are the payment for the government services that will be shut down.
Although many applauded the recent changes to the Dow Jones, I think the changes made to the index will hurt it in the long run. Although the three that were replaced are having their problems at the moment, I feel they have a greater potential to outperform the overall index over time. I feel the three that were added are trading near even value, while the three that were replaced are trading quite far below value. My portfolio echoes this belief, I have positions in all three that were replaced, and none in any that were added. Although I have considered adding all three of the new additions in the past, at this time I feel there are better opportunities elsewhere.
You may look at the P/E of Goldman Sachs and ask how I could feel this stock is trading at even value. First let’s consider the recent $11 Billion dollar fine to JP Morgan Chase (JPM) over the London Whale trading fiasco. JP Morgan’s response to their large fine was “It’s just the cost of doing business.” I find it interesting that the top brass made a settlement with shareholders money to keep them out of jail. That’s right, part of the settlement was the criminal charges against them were dropped. Isn’t it interesting too that they lost about as much shareholder money as the fine in the trade that went bad.
Goldman has done much worse than what JP Morgan did in the past, and got nothing more than a slap on the wrist then. It looks possible that they could get fined very large sums or even barred from business that they depend on for their earnings if they are caught doing some of the same things today. Goldman’s long history of indiscretions and shady deals greatly increases potential risks to earnings.
Problem is it probably won’t be bad press and a relatively small fine this time when they get caught. How much will shareholders have to pay to keep their top brass out of jail after they lose billions in a trade gone wrong?
You also have to consider Goldman’s past practices of employee stock awards. During the rebound they tried to award $12.6 billion in stock to their employees when they only earned $12 billion for the entire year. Of course these stock awards were stopped by shareholder outrage, but Goldman has a history of seeing its stock as a piggy bank that it can tap at will for exuberant employee bonuses. These generous stock bonuses greatly devalue their stock, and this year’s stock awards will likely begin rolling out in the next quarter.
At the same time you may look at Alcoa’s P/E and ask why I think this stock is greatly undervalue. Much of Alcoa’s earnings are being used for Capital Expenses to fund a large project that could increase earnings a great deal when completed. I feel that the stock is trading very cheaply to these potential earnings.
I have similar reasons for investing in or not investing in the other stocks.
Many of these sources of information were used in this article.
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Have a great day trading,
ronz
All of my past articles can be accessed here.
Disclosure: I have investments in AA, BAC & HPQ. I have no investments in GS, NKE, V or JPM. I am currently about 85% invested long in stocks in my trading accounts. Although several of my buy orders were close to filling none did and as a result I made no investment changes this past week. The dividend payments I received did not change my investment level. I consider myself somewhat 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 28 issues in the coming week and five 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.
