Stocks gave back a little ground after last week’s surge. There’s nothing wrong with a little pullback action after an exciting week of stock market gains and better-than-expected economic news. There are several reasons why the market retreated. The fears resurfaced over sovereign debt holdings over the weekend. The Wall Street Journal reported that the European stress tests on banks understated the risks associated with these holdings, as if everyone wasn’t aware of that likelihood. It still proved to be a negative for the Euro, which created a flight to safety in the Yen and US Dollar. The Dollar/Yen fell to the lowest level since 1995. The Dollar Index bounced off of Friday’s low, which was testing the support at the August 18th pullback low at 81.912 and its 200-day moving average at 81.56. The Dollar Index moving up off of these support points put pressure on commodities and the risk trade. After last week’s rally having been led by a significant over-performance by the risk trade, a pullback was likely heading into this week anyway. The Dollar Index ran into overhead resistance, very short-term, at its declining 50-day moving average at 82.59 and the initial Dollar pop to 83.02. As for the Dollar versus the Yen, it is deeply oversold and divergences are emerging. However, this is a new low and the momentum is against the Dollar.
It’s Merger Monday… okay, it wasn’t Monday and there weren’t any mergers. The big news was that former CEO Hurd is being sued by Hewlett-Packard HPQ (-1.0%) for allegedly breaking a confidentiality pact by speaking with Oracle ORCL (+5.9%) about a potential top job. This isn’t exactly market-moving news. This week has almost no key economic reports to digest. In a pinch, we might care about the July Trade Deficit and Weekly Jobless Claims, but unless they are way off of the mark, investors shouldn’t care. The flurry of buying at the beginning of a new month was true in July and August, but it takes much more than just an initial burst to sustain a rally.
Getting in the way of the bulls was the start of the election season. September marks the lead time politicians use to launch media campaigns. More specifically, the actual mudslinging between politicians starts after Labor Day. Perhaps this is the real reason why fashion dictates you not wear white after Labor Day. You might get splattered by the flying mud served up by hotly contested political debates. President Obama used the weekend to throw out a jobs bill spending $50 billion on infrastructure and accelerating tax write-offs for businesses. The tax breaks for businesses is clearly intended to be used as a debate tool for Democrats. Including it in a package of government spending should prevent Republican support. The $50 billion isn’t going to make a dent in the economy anyway, so this is just a token effort. Congress returns to session, puts up proposals that may or may not come to vote, not for the purpose of fixing an ailing economy, but to accentuate the differences between party ideals. On October 9th, Congress leaves for a month-long campaign trail. This is one of the reasons why the market will likely struggle in September, trying to decipher political rhetoric from real plans to move the economy out of this recession.
Technically, last week’s rally was significant. The S & P added 3.5%, moved off of a key support level at 1040, and broke above its 10-week moving average at 1082. It looks like a very nice test of the July low and could very well construct a well defined “inverse head and shoulders” pattern. The “neckline” would be the flat line at 1130. The shoulders are at 1040. The head was the July low, dipping down to 1010. Therefore, the breakout point requires a close above 1130. We have not consummated this pattern until this breakout is achieved. However, if we continue to build the base above 1040, the pattern will remain intact. The range from the neckline to the head, (1130 – 1010) is 120 points, which projects to 1250. The former intraday high in April was 1220. If we were able to complete this technical pattern and break out for a 4th quarter rally, the initial target would be for a run at the old high, with a chance of pushing to 1250 before completing the pattern.
Short-term, last week’s rally came up under a couple of technical resistance levels, starting with the S & P’s 200-day moving average at 1115.53. The August break left a small “opening gap” at 1121. The July and August peaks are at 1130. These obstructions should loom large in light of the lack of economic news as well as corporate news. In October, we’ll have earnings to help us out. By late September, analysts should be breaking down the good from the bad. If there are to be earnings warnings, they should come out over the next two to three weeks, ahead of earnings reporting season. There are plenty of reasons for traders to be a bit cautious here. However, the bigger picture indicates a better potential. Earnings will start being released by mid-October. The political wrangling will end November 2nd. The FOMC meets November 3rd. Holiday shopping and consumer spending will become the new market focus. We’re in the midst of the shift. Consolidation is a good thing. Be bold, wear white, but don’t give up!
Stocks gave back a little ground after last week’s surge. There’s nothing wrong with a little pullback action after an exciting week of stock market gains and better-than-expected economic news. There are several reasons why the market retreated. The fears resurfaced over sovereign debt holdings over the weekend. The Wall Street Journal reported that the European stress tests on banks understated the risks associated with these holdings, as if everyone wasn’t aware of that likelihood. It still proved to be a negative for the Euro, which created a flight to safety in the Yen and US Dollar. The Dollar/Yen fell to the lowest level since 1995. The Dollar Index bounced off of Friday’s low, which was testing the support at the August 18th pullback low at 81.912 and its 200-day moving average at 81.56. The Dollar Index moving up off of these support points put pressure on commodities and the risk trade. After last week’s rally having been led by a significant over-performance by the risk trade, a pullback was likely heading into this week anyway. The Dollar Index ran into overhead resistance, very short-term, at its declining 50-day moving average at 82.59 and the initial Dollar pop to 83.02. As for the Dollar versus the Yen, it is deeply oversold and divergences are emerging. However, this is a new low and the momentum is against the Dollar.
It’s Merger Monday… okay, it wasn’t Monday and there weren’t any mergers. The big news was that former CEO Hurd is being sued by Hewlett-Packard HPQ (-1.0%) for allegedly breaking a confidentiality pact by speaking with Oracle ORCL (+5.9%) about a potential top job. This isn’t exactly market-moving news. This week has almost no key economic reports to digest. In a pinch, we might care about the July Trade Deficit and Weekly Jobless Claims, but unless they are way off of the mark, investors shouldn’t care. The flurry of buying at the beginning of a new month was true in July and August, but it takes much more than just an initial burst to sustain a rally.
Getting in the way of the bulls was the start of the election season. September marks the lead time politicians use to launch media campaigns. More specifically, the actual mudslinging between politicians starts after Labor Day. Perhaps this is the real reason why fashion dictates you not wear white after Labor Day. You might get splattered by the flying mud served up by hotly contested political debates. President Obama used the weekend to throw out a jobs bill spending $50 billion on infrastructure and accelerating tax write-offs for businesses. The tax breaks for businesses is clearly intended to be used as a debate tool for Democrats. Including it in a package of government spending should prevent Republican support. The $50 billion isn’t going to make a dent in the economy anyway, so this is just a token effort. Congress returns to session, puts up proposals that may or may not come to vote, not for the purpose of fixing an ailing economy, but to accentuate the differences between party ideals. On October 9th, Congress leaves for a month-long campaign trail. This is one of the reasons why the market will likely struggle in September, trying to decipher political rhetoric from real plans to move the economy out of this recession.
Technically, last week’s rally was significant. The S & P added 3.5%, moved off of a key support level at 1040, and broke above its 10-week moving average at 1082. It looks like a very nice test of the July low and could very well construct a well defined “inverse head and shoulders” pattern. The “neckline” would be the flat line at 1130. The shoulders are at 1040. The head was the July low, dipping down to 1010. Therefore, the breakout point requires a close above 1130. We have not consummated this pattern until this breakout is achieved. However, if we continue to build the base above 1040, the pattern will remain intact. The range from the neckline to the head, (1130 – 1010) is 120 points, which projects to 1250. The former intraday high in April was 1220. If we were able to complete this technical pattern and break out for a 4th quarter rally, the initial target would be for a run at the old high, with a chance of pushing to 1250 before completing the pattern.
Short-term, last week’s rally came up under a couple of technical resistance levels, starting with the S & P’s 200-day moving average at 1115.53. The August break left a small “opening gap” at 1121. The July and August peaks are at 1130. These obstructions should loom large in light of the lack of economic news as well as corporate news. In October, we’ll have earnings to help us out. By late September, analysts should be breaking down the good from the bad. If there are to be earnings warnings, they should come out over the next two to three weeks, ahead of earnings reporting season. There are plenty of reasons for traders to be a bit cautious here. However, the bigger picture indicates a better potential. Earnings will start being released by mid-October. The political wrangling will end November 2nd. The FOMC meets November 3rd. Holiday shopping and consumer spending will become the new market focus. We’re in the midst of the shift. Consolidation is a good thing. Be bold, wear white, but don’t give up!