1. Chinese stocks are making another attempt at bottoming, and this one has promise. A falling wedge, positive RSI divergence and a potential fakeout beneath support as stocks rallied strongly yesterday and again today (today’s rise not shown), taking us towards 2100.
Underlying Source: Cobra/Stockcharts
2. The German Dax bounced yesterday at rising support. The technical situation is shown below – for my bullish case, the most important is to hold above the March 2012 highs – a previous resistance that should now be support. If the Dax can hold that rising support line then the next target is the cyclical bull highs to date of mid-2011.
3. The US SP500 index is already at new cyclical bull highs and so holding above that s/r line is again the priority for my bullish case. Again, it will be interesting to see if the index can hold the rising support and after a little small range consolidation around this weekend’s full moon, resume bullishly with that angle of trajectory. Recall that Presidential seasonality supports further gains all the way to the November elections, and whilst I wouldn’t specifically trade that phenomenon, it has been fairly reliable historically.
4. The Dow Transports continue to languish, but a little indecision at the bottom of the range could spell another reversal back into the range. It’s an important one to continue to watch.
Source: TSP Talk
Here is Ryan Puplava’s assessment of whether stocks are likely in a topping process here or not, and the Transports divergence is the only flag currently, he suggests:
- A shift out of risk assets and into defensive sectors. (false)
- Leading economic numbers and Fed surveys roll over (false)
- Transport or Industrial indexes not confirming each other in new highs (true)
- A lower high, or at least a break, in the market trend (false)
- Momentum failure (false)
- Flat/sideways market from support to break (false)
- Momentum divergence at a higher high (false)
- Distribution with 2400 or more declining issues on the NYSE in a given day (false)
Source: Ryan Puplava
5. Gold is also climbing a rising support and if about to face resistance close to 1800. It arrives here on fairly frothy sentiment, however, given its preceding 9 month range coiling and its peak seasonality period currently, I don’t place too much weight on the frothy sentiment. I rather suspect it will have a run where sentiment remains elevated. But let’s see how it deals with that horizontal resistance.
6. Euro-USD pulled back having reached overbought/overbullish, and could pull back a little further to rising resistance. The key question is whether it has made a medium term trend change given the renewed confidence in Euroland and the dollar-debasing US QE-without-end. We know that QE1 and QE2 announcements made for enduring rallies into pro-risk (after the initial spike and correction couple of weeks), which would suggest Euro-dollar, commodities and equities all rallying. There are no guarantees third time round, but market participants may lean more pro-risk, aware of that history.
7. The correction in pro-risk this week has done a reasonable job of deflating other overbullish/overbought indicators, in equities and crude oil amongst others. As previously noted, equities typically flirt with extremes for a period before rolling over, as opposed to hitting once and then collapsing, and we are generally looking at first touches. Indicators such as stocks above 50MA and bullish percent over call/put have reset sufficiently to enable stocks to rally again, if that’s the will of the market. The two US equity sentiment surveys of II and AAII both continue to show fairly neutral readings, and as I am looking for the next market top to be a cyclical bull market top, we really should see these reach extremes.
Source: Schaeffers Research / Investors Intelligence
Source: Bespoke / AAII
8. Natural Gas has been the stealth hit of 2012. Below is a weekly chart as of the end of last week and this week it has risen to 3.3. If you bought at the bottom in April, you would be up 75%. Well, my story is this: I was one to buy in long in 2010 and 2011 as it dipped several times below 4 (at what appeared excellent historic value and historic extreme cheapness versus oil), only to see dire performance continue and even worsen. Hence my aggregate position is still underwater but as the excess gas inventories have been declining it looks like it may eventually turn a profit. I consider this asset to really have been a good example of ‘the market can stay irrational longer than you can stay solvent’. My exposure was never that significant in my account, but it has taken a lot of patience to see a turnaround.
9. On the macro front, we saw a couple of bad US data reports this week, the worst being durable goods orders. As a result, US Economic Surprises has taken a sharp fall and although still positive, needs watching closely in case of a trend change. Due to aggregate leading indicators trending up, I don’t expect that to be the case, but let’s see ECRI’s latest reading later today.
Source: Sober Look / Citigroup
As can be seen from the Dhort chart (hat tip Antonio), there is a relationship between the durable good orders and the SP500 performance that makes the data dip alarming:
There is a history of volatility in the durable goods number but that dip is one of the most dramatic. It’s a flag, but not on its own enough to make me want to take profits on stock indices longs at this point. With the improvement in aggregate leading indicators, the positive technical picture for equities, the renewed global stimulus, and the Presidential seasonality, the balance is still bullish. But for that to remain, other forthcoming data (of a leading style) needs to return better. Something to watch next week.
10. US earnings season starts the week after next and there is a fairly compelling relationship between the ISM PMI and SP500 earnings year over year (hat tip Gary). As can be seen below, the latest data for August was just below 50, i.e. around zero growth. The expectations for this earnings season are for earnings growth over the same quarter last year of -3.4%, i.e. a drop. That does potentially set us up for earnings to come in between zero and -3.4, i.e. to be bad but to beat expectations, which would normally be enough to rally equities. Clearly, both the ISM PMI and the analyst expectations are only guides, but there is a potential scenario there to fulfil the technically bullish picture for stocks, in October.
Source: Calculated Risk
Have a great weekend everyone.