The energy sector certainly has the potential to kickstart the weak markets, but investors will need to watch for a number of key events outlined here by MoneyShow's Tom Aspray.
Stocks moved lower last week, as the rally attempt on Thursday fizzled and stocks closed mixed on Friday.
For some of the averages, it was the worst weekly loss of the past four months. The Spyder Trust (SPY) has declined for three out of the past four weeks, but is still only down 3.4% from the highs.
Many measures of the stock market have relieved their overbought readings from the September 14 highs. On that day, more than 80% of the stocks on the NYSE Composite were above their 50-day moving averages. This was one standard deviation above the mean of 57%.
Now only 57% of the stocks are above their 50-day MAs. A drop below 40% would be slightly oversold, but in June it hit a low of 11%, which was very oversold. In a market uptrend, the current reading is enough to support a new rally phase that could take the market to or above the recent highs.
The energy sector has the potential to fuel the next market rally. The performance chart above shows how the SPDR S&P Oil & Gas ETF (XOP), the Select Sector SPDR Energy (XLE), and the Spyder Trust (SPY) have done since the June lows.
On June 28, both XOP and XLE moved decisively above SPY, and have been outperforming the overall market ever since. For example, XOP is up over 22%, while XLE is up 16.3%, compared to a 11.5% gain in the S&P.
The chart shows that both XOP and XLE are well down from the highs on September 14, when they were up 31.3% and 23.5% respectively. As I noted last week, I think they are close to completing their corrections, though one more drop to even stronger support is possible. Both need to move above the prior three-week highs to indicate that their correction is over.
The energy sector has been holding up much better than crude oil prices, which finally broke their losing streak last week. If this sector is going to propel the market higher, then we should see some of the leading oil stocks turn higher in the next week or so.
Clearly, it is still a nervous market. Investors are becoming more concerned about the “fiscal cliff” as we get closer to the end of the year.
The downgrade of Spain’s credit rating to just above junk status led some analysts to conclude that they may be closer to requesting aid. This is what the ECB has been waiting for to start their bond-buying program. The OECD head warned Friday that the ECB’s delay in implementing their bond-buying support was hurting their credibility. Stocks in Europe lost 1.7% for the week, as their rally attempt also failed.
August data from the Eurozone on industrial production supported a slightly more positive outlook for third-quarter GDP. This helped offset the concern over sticking with the tight Eurozone austerity plans, as voiced by the IMF’s Christine Lagarde.
Even the surprising jump in the University of Michigan’s Consumer sentiment couldn’t stabilize stocks, either in Europe or the US. The surge to 83.1 was well above the consensus view of 78.3, and as the chart indicates, this is the highest reading since January 2008. A separate reading on the 12-month economic outlook was up ten points, and both suggested a more optimistic view of future income prospects.
There is a full economic calendar this week, with retail sales, the Empire State Manufacturing Survey, and business inventories out on Monday. Then on Tuesday, we get the Consumer Price Index, which may be interesting, as the Producer Price Index last Friday was higher than expected at 1.1%.
Also out Tuesday are industrial production numbers and the Housing Sentiment Index. The charts on the homebuilding stocks do look overextended, so this report may be quite interesting. This report provides a reading not only on the demand for housing, but also the homebuilders' view of economic momentum, and therefore may impact the markets.
More data from this sector follows on Wednesday with housing starts, and then Friday brings existing home sales. Of course, on Thursday we get the jobless claims, which dropped sharply last week, but the report was discounted due to a lack of quarterly data from one state. On Thursday, we also get the Philadelphia Fed Survey on manufacturing, as well as the Leading Indicators.
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