Crunch Time for Both Bulls and Bears (SPY, DIA, GLD, USO)
Courtesy of John Nyaradi
Weekly stock market commentary from Wall Street Sector Selector
Last week was yet another round in the current struggle between bulls and bears that ended virtually in a draw as indexes closed flat for the week.
However, next week’s trading , August 2-6, will very likely prove to be ‘crunch time’ for both bulls and bears, and by this coming Friday it’s quite likely that only one animal will be left standing.
Looking at My Screens
We remain in the “Yellow Flag” mode, expecting choppy prices ahead. However, it definitely appears that the latest rally is stalling below the 200 Day Moving Average on the S&P 500 and that we are still at the “tipping point” as we discussed earlier in the week.
As always the chart tells the story:
chart courtesy of StockCharts.com
In the daily chart of the S&P 500, you can see how we’re locked in this trading range between the all important 200 Day Moving Average at 1114 and the 50 Day Moving Average at 1081. The 200 Day is offering impressive resistance while the 50 Day offers almost equally impressive support, but there can be no question that this will be resolved one way or other in the near future with a break above or below these demarcation lines.
Taking a wider view, we can also see that we are at a critical juncture:
Chart courtesy of Stockcharts.com
The chart above is a 12 month view of the S&P 500 and you can see how this offers a clear view of longer term trends, calling the beginning of the bear market in late 2007 and the new uptrend a couple of months after the now infamous March lows of 2009.
Today you can see that we’re right at the 12 month moving average, just above it, actually, and that the index is struggling both above and below this important line in the sand.
The more ominous indicator on this chart is the MACD, which while still barely positive and so on a “buy” signal, has rolled over dramatically since the March uptrend began and now sits perilously closer to a “sell” signal on a longer term basis.
We remain in inverse ETFs and cash in our Standard and 2X Portfolio and are bearishly positioned in the Option Master Portfolio.
The View from 35,000 Feet
Most macro economic news was bearish this week but still with a few spots of light in an increasingly gloomy landscape.
On the bullish side of the ledger, the Chicago PMI came in with a positive print for July, rising to 62.3 from 59.1, the Case Shiller home index showed rising housing prices in most regions and earnings reports continued to land on the positive side of the equation.
For the bears there was plenty to chew on with Q2 GDP coming in at a worse than expected 2.4%, down from 3.7% in the prior quarter, while the ECRI weekly index declined further to -10.7%, keeping it in solid recession or at least slowing growth territory. Also, revised GDP numbers from previous quarters showed that the recession was worse by 1% or more than previously reported.
Durable Goods Orders dropped unexpectedly while the Fed Beige Book reported continued slowing economic activity and, to no one’s surprise, money keeps flowing out of domestic equity funds whose assets dropped by $$1.5 Billion for the week of July 21st with apparently most of the money, old and new, going into bond funds which grew by $7.8 Billion over the same time period. (data from Investment Company Institute, ici.org)
Governor Schwarzenegger put California back on fiscal emergency status and ordered the state’s public workers to take three days unpaid leave per month while the state tries to close a $19 Billion budget gap which equals almost 25% of its total budget of $85 Billion. Apparently the state will run out of cash sometime in the fall and go back to the bad old days of IOUs if a solution can’t be found before then.
As we discussed in one of our daily updates this week, St. Louis Fed President James Bullard warned of deflation and a Japanese style “lost decade” and that the Fed might have to fight that with more easing which is particularly interesting since historically he has been one of the more hawkish voting members.
On the consumer front, nearly 25% of U.S. consumers have credit scores of below 600 which puts them in the high risk category and ineligible for a home loan backed by Fannie Mae or Freddie Mac and just above the 550 level which is the below average to bad basement range.
What It All Means
One would really have to be Pollyanna to believe that we’re heading for brighter days ahead in the short term. Corporate profits are a backward looking gauge and while positive for now it’s hard to imagine that phenomenon continuing as comparisons become more difficult and the negative macro indicators continue to add up.
The Fed-speak this week makes it clear that they’re telegraphing their intention to step in to further stimulate the economy if need be, and although their options have become relatively limited, Dr. Bernanke and his crew can always be counted upon to be game changers.
As we reported last week, “Highest probability for the coming days would be a decline within the trading range we have been in as macro indicators could likely continue their negative streak, earnings remain positive, market participants remain suspicious of the true health of the European banks and technical indicators trump for the short term ahead.”
Our view remains unchanged this week.
The Week Ahead
As I mentioned at the outset of this letter, this week is crunch time for both bulls and bears due to the onslaught of economic news that we’ll see over the next few days, including news from the all important housing sector, factory orders, Institute for Supply Management and the finale on Friday with the July Non Farm Payrolls report. On the earnings front, 103 S&P 500 companies will report this week.
Economic Reports:
Monday:
10:00: June Construction Spending, July ISM Index
Tuesday:
0830: June Disposable Income
1000: June Factory Orders, June Pending Home Sales
1400: July Auto Sales
Wednesday:
0815: July ADP Employment Change
1000: July ISM Services
Thursday:
0830: Initial Unemployment Claims, Continuing Unemployment Claims
Friday:
0830: July Non Farm Payrolls
Sector Spotlight:
Leaders: Copper, Agriculture, Italy
Laggards: VIX, Homebuilders, Viet Nam
So now August is at hand and we find ourselves in the “dog days of summer” when Sirius, the “dog star” is the brightest star in the sky. In ancient times, the dog days were considered an evil time, and maybe, considering today’s tough economic times, the ancients were on to something here.
For my part, I’ll be watching the market, positioning our portfolios and writing you as events unfold next week. But for the weekend, I’m heading up to Fall River for a family picnic and a little fly fishing, hoping that the “bug gods” will be good to me and that some trout will be dumb enough to think I’m a caddis fly.
Disclosure: RWM, PSQ, SH, SKF, SPY Put Option
John Nyaradi is Publisher of Wall Street Sector Selector, a professional ETF Trading System, designed to capture profits in both up and down markets. It is specifically designed for active traders, monitoring more than 100 ETFs to find the best opportunities. For a risk-free 30 day trial of John’s Wall St. Sector Selector, click here.
