July 14, 2018
The stock market started off the week on a bullish note, as the strong close on July 6th, a reaction to the strong jobs report, signaled that the markets major trend had resumed. The short-term analysis forecasted a likely pullback during the week, which was supported by the fact that the averages hit my initial targets last Monday.
The sharp drop after the close on Tuesday, likely in reaction to new proposed Chinese tariffs, hit the stock index futures and Asian markets hard. The S&P futures opened Wednesday well above the lows, and though the close was negative, the selling did not increase through the day. Stocks turned higher on Thursday. For the week, the S&P 500 was up 1.5%, the Nasdaq Composite gained 1.8% and the Dow Industrials rose 2.3%.
Though the trade conflict did not subside last week, it has become clear that the business community, including the decidedly conservative US Chamber of Commerce, are becoming more nervous. In a study released last Monday, they commented that “New tariffs on steel, aluminum and Chinese imports, as well as the potential for additional tariffs on autos and auto parts, have pushed us to the brink of a global trade war." These concerns were also the focus of a weekend article in Barron’s “Tariffs Taking Toll on Business Confidence”.
As I pointed out recently in “Three Warning Signs Of A Bear Market”, when a bull market transitions to a bear market, there is a deterioration in both investor and business confidence. Friday’s Consumer Sentiment came in a bit lower than expected, and was down from June’s final reading. The major uptrends are still clearly intact.
In the latest American Association of Individual Investors survey, the bullish % jumped 15.2 point to 43.1%, which is the highest reading since February 15, when it hit 48.5%. The bearish % dropped 10.1 points to 29.2%. This could be an aberration, as it is somewhat inconsistent with other measures suggesting that investors are still nervous.
The Equity Put/Call ratio has been rising steadily since the middle of June, and is now testing the downtrend (line a). This is a sign that investors are buying puts to protect the stocks in their portfolios going into earnings season. The big bank earnings Friday were disappointing, as Citigroup (C) and Wells Fargo (WFC) were down 2.2% and 1.2%, as both fell short on expected revenues.
In my June 13 article, the negative weekly relative performance analysis on the Financial Sector Select (XLF) indicated it was a sector to avoid. XLF is down 2.4% in the last month, while JPMorgan Chase (JPM) is down 2.8%.
With the plethora of issues hanging over the global markets, it should be no surprise that many wonder whether they should believe the Wall Street strategist’s year-end projections for the S&P 500. In the latest update from CNBC, the average year-end target for the S&P 500 is 2959, which is 5.6% above Friday’s close at 2801. On the high end we have Canaccord Genuity’s Tony Dwyer at 3200, while Morgan Stanley’s Mike Wilson is on the low end at 2750.
Every year, I point out that making these sorts of predictions is a pointless exercise, which I am sure is not popular amongst the strategists. For the investor, it is their stock picks and overall trends that are more important than guesses about the year-end target level for the S&P. I only discuss price targets that are derived from technical methods.
The completion of the weekly triangle or flag formation in the S&P 500 (lines a and b) in May allows one to determine price targets. The high of the formation (line 1) is then added to the breakout level which gives a potential target of 3090. This target is not my year-end prediction, and could be met earlier than year-end, or possibly even early next year.
I have added the S&P 500 Advance/Decline line (in red), which closed at a new high last week. This is a positive for the intermediate-term and major trend. At the February lows, it was the weekly A/D lines that were “consistent with a correction, not the start of a bear market or a more severe correction”. The new highs in the A/D line are consistent with a new high in the underlying average.
The Invesco QQQ Trust (QQQ) tracks the Nasdaq 100, and was up 2.3% last month. The QQQ completed its trading range (lines a and b) in the middle of June. The trading range in the QQQ has potential upside targets at $197.26, which is 9.8% above Friday’s close. The QQQ is already up 15.8% YTD.
The breakout in prices, as I noted at the time, was confirmed by a new high in the Nasdaq 100 A/D line, which made another new high last week. It had recently pulled back to its rising WMA. The daily A/D line (not shown) also looks strong after staging an important breakout in early May.
The small cap iShares Russell 2000 (IWM) was down 0.5% last week after leading the other averages the previous week. The completed trading range (lines a and b) has upside targets at $177.68, There is quarterly pivot resistance at $183.40.
The Russell 2000 A/D line overcame its resistance (line c) on May 11 and has made a series of higher highs, though it was a bit lower last week. The daily A/D line (not shown) made a new high last Monday and it is above its WMA.
The SPDR Dow Jones Industrials (DIA) has lagged the other major averages all year, up just 2.1% YTD. DIA has made little upside progress since it overcame the downtrend (line a) in May. Though the pattern is not as clear as it is in the other averages, I can still calculate the upside target at $295.31. This is 18% above last Friday’s close.
The Dow A/D line moved back above its WMA two weeks ago, but has not yet broken out to the upside, as it is still below its resistance (line c). The weekly relative performance has been below its WMA for most of the year, which was a sign that it would underperform the S&P 500.
Last week’s Viper ETF Sector Report includes the new third quarter pivots, which will be in effect until the end of September. On July 6, all of the ETFs, except the Vanguard Financial (VFH) and Industrials Sector Select (XLI), closed the week above the new pivots. The table also reveals that the RS and OBV analysis was negative on VFH, XLI, and also the Materials Sector Select (XLB). I am continuing to avoid these three sectors for now.
The yield on the 10-Year T-Note closed on the lows at 2.831%, and there is chart support next at 2.780% and then at 2.759%. A decisive break of both of these levels would signal sharply lower yields. The weekly momentum indicators like the MACD-His are negative and declining.
Crude oil had a wild ride last week, as the drop of almost $5 on Wednesday cleared out many weak long positions, even though crude started to stabilize later in the week. Still, the September contract closed down $1.62 as it came close to the 20-week EMA at $67.60. There is more important chart support at $64.20 (line a).
The weekly OBV has formed a negative divergence from prices (line b) and closed the week below its WMA as well as the support (line c). The weekly Herrick Payoff Index (HPI) also has formed a negative divergence (line d) but is still well above the zero-line. This indicates positive money flow into crude oil futures. The daily studies are mixed, as the OBV still looks strong, so it should be an interesting week.
There is a busy economic calendar this week with Retail Sales and the Empire State Manufacturing Survey on Monday. This is followed by the Housing Market Index and Industrial Production on Tuesday. The all-important Leading Indicators are out on Thursday, as is the Philadelphia Fed Business Outlook Survey.
Trade and earnings are likely to dominate the markets this week, and while the earnings are forecast to be strong this quarter, holding individual stocks during their earnings can be difficult for investors. During the last earnings season there were a number of stocks that exceeded estimates for earnings and revenues, but still dropped sharply. Therefore, investors should concentrate on diversified ETFs for the next few weeks.
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