Technical action in most markets seems to show this week's downswing was only a temporary pullback, which means buying season can continue for investors who control their risks.
The month of July is getting off to a rough start. Worldwide rate cuts last Thursday did not impress investors or traders. This set the stage for June’s uninspiring jobs report, which led to stocks closing the week on a negative note.
The rate cuts got a mixed reaction from investment professionals. While some applauded them, others saw them as a sign that the economic recovery is in worse shape than central bankers are admitting.
The yield on the ten-year T-Note turned lower on Friday, after having risen from a low of 1.44% on June 1 to a recent high of 1.67%. The chart points towards still lower yields as the completion of the flag formation (lines a and b) still has downside targets in the 1.35% area. In short, from a technical standpoint, there are no signs yet that rates have bottomed.
The economic news was mixed last week, though things started on a sour note. The ISM Manufacturing Index last Monday contracted for the first time since July 2009. Export orders were a serious negative, and the PMI Manufacturing Index on Monday also reflected the weakest rate of growth in 18 months.
Factory Orders the next day were better than expected, and the ISM Non-Manufacturing Index last Thursday still reflected a decent rate of growth, though it was lower than May’s reading.
The health of the economic recovery is difficult to predict at this point, as there are no clear signs like there were in 2007 and 2008. That time around, the technical outlook turned negative well ahead of the fundamentals, and it remained negative until March 2009.
The current technical readings, as I discuss in more detail later, are suggesting that stocks have completed a significant bottom. It is always important to keep an eye on what it would take to change that view. There are key levels in the Advance/Decline (A/D) lines that must hold in order to maintain the positive outlook.
The economic calendar is light this week, but earnings season begins again with Alcoa (AA) reporting after the close on Monday. The markets are likely to focus on earnings for the majority of the week.
On Wednesday, we get International Trade numbers and the FOMC minutes, followed on Thursday by jobless claims as well as Import and Export Prices. Then on Friday, we get the Producer Price Index and the University of Michigan’s consumer sentiment survey, which is expected to decline slightly.
WHAT TO WATCH
Friday’s stock-market decline pushed most of the major averages into negative territory for the week, though all the major averages closed well above the lows.
The S&P 500 had a low of 1,348 but closed above 1,354. The technical readings suggest that this is just a pullback within the market’s overall uptrend, and it could be over by the middle of the week.
The daily chart of the NYSE Composite and the cumulative NYSE Advance/Decline line reveals that important resistance in the A/D line (line c) was broken last week. The corresponding price resistance was not broken, indicating that market internals are acting stronger than prices.
This kind of pullback is generally what occurs in the early stages of a new intermediate market uptrend, and is similar to what occurred last October 13. Another few days of selling would be enough to take the A/D line back to its uptrend (line d) and its rising WMA. The bullish case will be confirmed by a move in the A/D line above last week’s highs.
Conversely, a drop in the A/D line below its rising WMA and more importantly the June 25 lows (line 1) would suggest that we could see a test of the June lows.
Both the individual investor and the financial newsletter writers became more bullish last week, but the worse than expected jobs numbers could alter their enthusiasm. If my bullish view is correct, the current correction should be a good buying opportunity.
NEXT: Key Levels for Stocks and Tom's Outlook