STOCKS

Last week’s ECB action has convinced many that the Fed will also ease this week but while the stock market has resumed its uptrend there is one key sector according to MoneyShow’s Tom Aspray whose failure to rally should not be ignored.

The impressive gains in the stock market Thursday combined with the weaker than expected jobs report on Friday has convinced many that future easing by the Fed is indeed a certainty. Of course, historically this is a very positive sign for stock prices and, for many months, I have been looking for prices to move higher into the end of the year.

Given the historical patterns, it is likely to be a bumpy ride going into the end of the year. During election years, volatility has been high in September, as I discussed Friday, and the ECB plan still faces some hurdles with the ruling from the German constitutional court due on Wednesday. Though German Chancellor Angel Merkel has supported the plan, many in Germany, including the Bundesbank President Jens Weidman, does not.

chart
Click to Enlarge

The FOMC Meeting also begins on Wednesday so this week’s markets will be especially vulnerable to some wide swings. Last week’s strong action has improved the technical outlook, which had deteriorated in August, but it is still not looking as strong now as it did during the fall of 2010 or 2011.

Of particular concern is the weak action in the Dow Jones Transportation Average, which up through last Thursday’s close, was only up 0.5% for the year compared with an 8.8% gain in the Dow Jones Industrial Average.

The chart of the Industrials shows a pattern of higher highs going back to 2011 (line a) as it is very close now to the highs that were made in early May. The weekly chart also shows a clear pattern of higher lows, which puts it in a clear uptrend

The Dow Jones Transportation Average started to diverge in early 2012 and shows a pattern of lower highs, line b. The failure of the Transports to confirm the Industrials may warn of future economic weakness which could mean that the rally in the Industrials is not sustainable.

Long-term readers will know that I follow the Transports closely and they have been leading the overall market higher from the March 2009 lows until the July 2011 highs (line 1).

The Dow Transports were much weaker during last summer’s decline and have never recovered. The key support level to watch is at 4850 as a weekly close below this level would confirm a new downtrend in the Transports.

chart
Click to Enlarge

The global stock markets are being led higher by the German Dax, which is up 22.3% so far this year. The monthly chart shows that the downtrend from the 2011 highs has now been broken. The resistance from the 2007 highs, line a, is now at 7440 with the 2011 high at 7600.

The last two days of the week are likely to carry the most weight in terms of the economy. On Thursday, we have the jobless claims and Producer Price Index, followed by the FOMC announcement.

The Consumer Price Index is out Friday along with Industrial Production, and the August data on Retail Sales which were up in July for the first time in four months. Also being released is the mid-month reading on Consumer Sentiment from the University of Michigan which may be impacted by last Friday’s jobs report.

Consumer spending is an important force for the economy in the last part of the year and the retail sector is typically seasonally strong from September through Christmas.

Next: What to Watch

Tickers Mentioned: SPY, QQQ, DIA, IWM, GLD