The Week Ahead: 3 Reasons to Put Stocks on Your Summer Shopping List

05/22/2015 5:00 pm EST

Focus: MARKETS

Thomas Aspray

, Professional Trader & Analyst

While the weak economic numbers so far in 2015 have discouraged many investors from buying stocks, MoneyShow's Tom Aspray shares three reasons, including the strong action of the Leading Economic Indicators why stocks should be on your summer shopping list.

Though the major averages provided few fireworks last week, the majority of major averages did post solid. There were a number of individual stocks that did post significant gains for the week as it continues to be a stock pickers market. For those who do not closely follow the markets, the price action in the averages obscures what is happening in many stocks.

There were also a number of losers, with the airlines stocks dropping sharply last Wednesday as former market leader Southwest Airlines (LUV) was down over 10% for the week. The series of new closing highs in the S&P 500 has many of the TV pundits confused. As I stressed in 5 Mistakes to Avoid for the Rest of 2015, changing you investment plan based on any media sound bites is a prescription for disaster.

I was pleased that Jeffrey Gundlach, who manages $64 billion in the bond market, seems to feel the same way (Beware of CNBC Pundits). He does not have a high regard for their interest rate analysis, "The commentators on CNBC “don’t get it” Gundlach said, in regard to statements that the recent spike in interest rates was due to fears of Fed tightening."

As I noted two weeks ago Are These Key Markets Changing Direction? investors bailed out of equity funds in April and its getting more difficult to find a market bull. The latest posting on the wall of worry is the realization that the Dow Transports have failed to make a new high with the Industrials since last November.

The longer-term chart I published on Friday points out that earlier in the bull market the Transports diverged for 21 months before blasting off to the upside. I have yet to see this cited in the press. Certainly, I would be more bullish on the market if the Transports were also making a new high, but there are no warning signs yet of a major correction.

The weak economic numbers so far in 2015 have discouraged many investors from buying stocks as according to AAII only 25.2% are bullish as 50% are neutral. This is bullish in my opinion, especially when combined with the generally low public participation in the stock market.

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The recent correction in the US market was spurred by a fall in the EuroZone markets and a long overdue bounce in the EUR/USD. The German Dax broke through major resistance (line a) as the plunge in the euro accelerated. The economic outlook for the EuroZone has clearly improved, as I expected last September.

However, it is too early to be confident that the correction in the Dax is over, but I am quite confident that the euro has not yet completed a bottom (see circle). After such a serious decline, one should not expect a significant low for the euro to be completed for several months. Greece's debt problems are still hanging over the market and it may cause a brief round of selling in the coming months.

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The economic data has kept many on the sidelines as the data over the next two months will be watched closely. Last week's Leading Indicators (LEI) from the Conference Board had a nice gain of 0.7% while the consensus was looking for just a 0.3% rise. The LEI is still in a clear uptrend and shows no signs yet that it is topping out.

As I noted in detail (Avoiding Bear Markets), the LEI—along with the NYSE A/D line—have a good record of warning in advance of bear markets and recessions. The increase was due in part to the increase in building permits. The housing starts were also strong last week as they were up over 20%, but the Housing Market Index reflected a bit less optimism from the builders. The data on housing is mixed as Existing home sales last Thursday shows a drop of 3.3%.

The manufacturing data last week was much less positive as the data from the Chicago and Philadelphia Fed were both weaker than expected as was Markit's Manufacturing Index for May. Their job market component did show good strength.

The manufacturing data needs to be watched over the coming months, but I think the LEI is a more reliable economic indicator. For those not in the stock market, the low level of bullish sentiment, the positive trend from the Euro and US markets—along with the bullish economic outlook from the LEI—is a solid vote for having stocks on your buy list.

Of course, a 5-10% correction is always possible over the summer months, but I think it will be an opportunity to buy stocks.

NEXT PAGE: What to Watch

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I think the consumer data will play a key role in the coming months and I am watching the retail stocks closely. The S&P 1500 Retailing Industry Group is still locked in a thirteen week trading range and it is holding well above its weekly support at line b. The group staged an impressive breakout last November, and therefore, the recent trading range is likely just a pause in the uptrend.

The relative performance broke its downtrend last August signaling that it was becoming a market leader. The completion of the bottom formation was confirmed after the RS line successfully tested its WMA in November. The strong uptrend in the RS, line d, is still consistent with a market leading sector.

Last week both Walmart (WMT) and Lowe’s Companies (LOW) disappointed the market with their earnings. On the plus side, the results from Home Depot (HD) and Target Corp (TGT) were strong and both closed the week higher.

Even with a holiday shortened week, there is plenty of important economic data scheduled to be released this week. On Tuesday, we have the Durable Goods, S&P Case-Shiller HPI, New Home Sales, Consumer Confidence, as well as both the Dallas and Richmond Fed Manufacturing indices.

On Friday, we get the preliminary reading on first quarter GDP, Chicago PMI, and the final reading for May on Consumer Sentiment from the University of Michigan.

What to Watch

The higher weekly close in the major averages has further improved the technical outlook but stronger A/D numbers are needed in this holiday shortened week to signal upward acceleration. The market leading healthcare, biotech, and technology sectors have completed their corrective patterns.

A sharp push to the upside and a move to the 2160-2175 area in the S&P 500 would clearly catch the majority by surprise. Such a rally—if accompanied by a sharp increase in bullish sentiment—would need to be watched closely.

The 5-day MA of the S&P 500 stocks above their 50-day MA has clearly turned higher and closed at 63.2% on Thursday, which was just above the mean of 62.24%. It could move to the 78-82% area. For the Nasdaq 100, just 60.4% are above the 50-day with the mean at 62.11%. In November, the % came close to the 90% area.

The NYSE Composite made another new high last Thursday. The daily starc+ band is at 11,377 with the weekly at 11,577, which is just above the quarterly pivot resistance at 11,527. There is initial support now at 11,163 and the 20-day EMA. The May low of 10,961 is now more important support.

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The daily NYSE Advance/Decline line does appear to have completed its short-term correction as it has moved its prior swing high and its WMA. A strong move above the April 28 high would be quite bullish. The weekly A/D line (not shown) is now testing its April highs and is still well above its rising WMA.

The weekly McClellan oscillator has dropped back below the zero line after testing the resistance at line d. On a pullback, I would expect it to hold above the May low.

NEXT PAGE: Stocks

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S&P 500
The Spyder Trust (SPY) spent most of the week trading above the April high $212.48 and the resistance at line a. The daily starc+ band is at $216.43 and the weekly has risen to $219.97. 

The rising 20-day EMA is now at $211.68 with the preliminary June pivot at $211.27. There is additional support in the $209.50-$210 area.

The S&P 500 A/D line made another new high last Monday and is well above the April highs as it is leading prices higher. Along with the Nasdaq 100, it is acting the strongest of the A/D lines. Initial support for the A/D line is at its rising WMA and then at line c.

The daily OBV is still lagging prices with resistance now at line d. The weekly OBV (not shown) is well above its WMA and has finally exceeded the February high.

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Dow Industrials
The SPDR Dow Industrials (DIA) finally moved above resistance at $182.24 and made a new all time high. The daily starc+ band is at $185.45 with the weekly at $188.32. DIA was down on Friday but still higher for the week with the 20-day EMA at $181.12.

The daily starc- band is now at $179.88 with the May low at $176.86.

The daily Dow Industrials A/D line is holding well above its rising WMA but has not yet moved above the December 2014 highs, which is needed to confirm the new price highs. There is initial support at line g, and then the May lows.

The daily OBV tested its long-term resistance at line h, before turning lower.

Nasdaq 100
The PowerShares QQQ Trust (QQQ) closed above the prior two week highs but has not yet surpassed the April high of $111.16, which is only about 0.5% above Friday's close. The daily starc+ band now stands at $112.45 with the weekly much higher at $116.40. The daily chart shows an upward trading channel with the upper boundary at $113.50.

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The daily Nasdaq 100 A/D made a convincing new high last Monday and is acting stronger than prices. This suggests that the QQQ is also likely to make a new high in the coming weeks. The WMA of the A/D high has also turned up more sharply.

The OBV continues to lag prices as it is still well below the April highs. It is back above its WMA and support at line e. The weekly OBV (not shown) is still below its WMA.

The 20-day EMA is at $108.94, which is just below the tentative monthly pivot for June. There is now more important support in the $107.50-$108 area.

Russell 2000
The iShares Russell 2000 (IWM) continued to lag the other market averages last week as it formed two dojis and tested its 20-day EMA on Friday. There is still strong resistance in the $126-$126.90 area and then the April high at $127.12.

The monthly pivot for May is at $122.99 with the quarterly pivot at $212.39.

The daily Russell 2000 A/D rallied back to its former uptrend, line g, but has not yet been able to move above it. The WMA is rising slightly and a drop below the May 13 low would be a sign of weakness.

The daily OBV turned lower on Friday but did make a new high on May 11. The weekly OBV (not shown) looks even stronger as it has made a convincing new high.

NEXT PAGE: Sector Focus, Commodities, and Tom's Outlook

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Sector Focus
The iShares Dow Jones Transportation (IYT) had two consecutive closes below the quarterly pivot at $158.47 early in the May before dropping more sharply. As I noted in Friday's Don't Fall for the Transports Trap, it still looks weak technically and shows no signs yet of bottoming.

It is now down over 7% for the year and is the weakest of the sector ETFs that I follow. The industry groups in the Transports, like the railroads (see chart), are some of the worst performers.

The Select Sector Utilities (XLU) is now down 5.5% for the year and it is the only sector ETF—other that IYT—that is lower for the year. The Select Sector Industrials (XLI) is now up 0.8% for the year.

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The Select Sector Financials (XLF) has been moving higher and the weekly technical studies are all positive as XLF is up 0.7% for the year.

The Select Sector Health Care (XLV) looks ready to close at a new weekly high as it is now up 9.9% for the year leading the Select Sector Consumer Discretionary (XLY) by a wider margin as it is now up 6.8%.

The Sector Select Technology (XLK) has improved technically and has become a market leader, as it is now up 5.7% for the year. The Sector Energy (XLE) has corrected from its highs but is still up 1.5% for the year.

The defensive Select Sector Consumer Staples (XLP) is up 1.7% for the year.

Crude Oil
The crude oil futures did rebound from the week's lows but were still down for the week. The daily technical studies, including the HPI are still negative and suggest that the correction is not over yet.

Precious Metals
Both the SPDR Gold Trust (GLD) and Market Vectors Gold Miners (GDX) rallied sharply two weeks ago, which caused a brief spike in the bullish sentiment. The technical studies, however, did not improve and the gold miners, as discussed last week in More Trouble for the Gold Miners? look vulnerable to a further decline.

The Week Ahead
The lack of enthusiasm for the stock market is surprising with the market averages near all time highs. Everyone is concentrating on the grind higher in the averages and ignoring some of the very strong stock charts. I continue to think stock traders will be rewarded in the second half of the year and would caution those who are in longer-term maturity bond funds.

On Tuesday, May 5, I was concerned that we would see a deeper correction so I advised traders to reduce the risk in the market tracking ETFs (Was Monday a Rally Failure?) The weekly trend of the NYSE A/D line stayed positive throughout the correction and it continues to favor buying stocks not bonds.  There are no signs of a bear market or a recession so I continue to think that stocks are the best bets.

As I recommended over six weeks ago, those who were not in stocks should have begun a dollar cost averaging position and I would stay with your plan. For those looking for a bit more leverage without the volatility of individual stocks during the summer, stick with the sector ETFs.

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Don't forget to read Tom's latest Trading Lesson, 5 Mistakes to Avoid for the Rest of 2015.  

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