We all knew this market was going to rally and why not? What pundits are forgetting is that insomuch as the bad news is a known, the market has every reason to rally. Yes, we are kidding, but this is what the market perceives not reality. The green shoots are going nicely, thanks to the inflows of cash from the
US government and kind words uttered by Chairman Bernanke. The star watchers have missed this rally entirely shorting into various astrological events. Money, which has been sitting on the sidelines in piling into the markets and “happy days are here again” tra laa laa.
We have seen, on the daily charts, five or so huge sprints to the upside and only one huge dump to the downside on August 17th. Mr. Market is certainly wearing the bull’s costume to this party. The rally has been so fierce that we closed above the upper Bollinger band on the daily chart of the S&P 500. We all know that we really can’t stay there very long unless the volatility expands further. The S&P 500 enjoyed a 2.04% rally in the Friday session, which is a huge rally on good volume. The Russell 2000 enjoyed a 2.38% rally. The surprise for the session was the NASDAQ with only a 1.33% rally. Remember, this index has led the prior rallies so, this is a concern. On the other hand, the US Dollar index retreated in the same Friday session but only dropped 0.33%, not much when compared to the rally in the equity and commodity indices. Thus far every time the US Dollar retreats, commodities (which are priced in US Dollars) naturally have rallied and the
US stock market rallied. It seems that the rallies, in part, are due to the weakness in the currency. That said, we note that the rally in percentage terms for the indices was far greater than the percentage retreat in the US Dollar index. This tells us that true investment is being made in this rally, and that this rally is more than a function of the weak US dollar and short covering. From this data we see that some of the money market money, sitting on the sidelines, is flowing back into this market. This does make sense if you look at the return of the money market funds vs. the returns on the market. This further helps us to believe that much of the fear of another crash is not in this market. However, when we look at the options market we get a slightly different view. Notice that there are plenty of longer term puts being bought. This is a kind of term insurance for the market. Very interesting times.
We are hearing that the auto companies are calling back workers and increasing production. We think this is a mistake and once the “cash for clunkers” promotion is over, the wallet will return to the hip. In other words, why are the car companies boosting inventory when they have finally liquidated some of their excesses?
We guess that we think this way because we don’t have the income of the CEO’s of the car companies and our income is based our work, not the work of others. This is the last week of the month and therefore we will see some movements by portfolio managers trying to catch up with the market or to paint their portfolios. In either event these actions should serve to add some volatility to the market and probably some more upside movement.
Monday:
Chicago Federal Reserve’s bank “National Activity Index” is released. Tuesday: S&P/Case-Shiller August home price index is released at 10:00 and August consumer confidence is released at 10:00. Wednesday: July durable goods are released at 8:30, July new home sales are released at 10:00 and Atlanta Fed President Lockhart speaks. Thursday: 2nd quarter GDP is released at 8:30 and mutual fund sales/redemptions is released. Friday: July personal income and consumption is released at 8:30 and August Michigan Sentiment is released between 9:45 and 10:00.
The US Dollar Index declined for the 4th day in five in the Friday trading session. The chart looks awful and looks as though we could easily test the August low of 77.52. We certainly would have to close above 78.91 to annoy the bears and would need a further run to about 79.30 before the shorts would be inclined to cover. The longer term down trend line is at 79.75. In spite of a four-day retreat, there remains plenty of room to the downside. Nothing we look at is oversold! We are below the Ichimuko Clouds for the daily, weekly and monthly time-frames. All the indicators that we follow herein are pointing to lower levels. The 5-day moving average is at 78.74. The top of the Bollinger band is at 79.91 and the lower edge is seen at 77.54. When looking at the weekly chart, it becomes clear that should we break below 77.52 that we will retest the 76.025 low of September 2008. The downtrend line for the Friday session is at 79.628 and unless this market closes above that level, there will be little out there to scare the bears into covering their positions. Meanwhile, this weakness in the US Dollar index is supportive of the US Stock and commodities markets, both of which have been in rally mode. Keep your powder dry and remember John Murphy’s book on intermarket relationships. His new book, THE VISIAL INVESTOR would be a great read for those wishing to make money in this sort of market.
The S&P 500 rallied in the Friday session breaking out to the upside for the week. This index has been up 4 of the 5 days this past week. We are overbought as measured by the stochastic indicator which continues to issue a buy-signal. The other indicators that we follow herein all have plenty of room to the upside and all, but the RSI, are not overbought at this time. All the indicators continue to point higher. We close above the upper Bollinger band and we will have trouble staying there. The 5-period moving average is at 998.95. The upper edge of the Bollinger band is at 1022.29 and the lower edge is seen at 968.17. It seems as though most portfolio managers are chasing this market trying to catch up to the gains the S&P 500 has logged in. This kind of feeding frenzy generally does not end well so please be careful. We are above the Ichimuko clouds for the daily time-frame, but are in the clouds for the weekly and below the clouds for the monthly time-frame. We are overbought on all time-frames but all time frames continue to point higher. When we look at the Market Profile chart, we are impressed that there is little to no resistance overhead so, we could melt up further.
The NASDAQ 100 is not as overbought as is the S&P 500. That said, there is plenty of room to the upside. Further, the Market Profile chart show us that we are at a level where we could see a resistance free rally taking the market to 1705, then to 1736 and 1767. All the indicators that we follow are pointing higher none are overbought. We are above the Ichimuko Clouds for the daily and weekly time-frame but in the clouds for the monthly time-frame. The 5-day moving average is at 1600.30. The top of the Bollinger band is at 1640.26 and the lower edge is seen at 1576.52. When looking at the Bollinger bands we are impressed that they seem to be getting narrower which would indicate that the volatility will soon pick up. We are overbought on the weekly chart and the monthly chart. This index seems to have been a source of funds for the rally in both the Russell 2000 and the S&P 500.
The Russell 2000 enjoyed a robust rally in the Friday session completing a four-day rally this past week. We are not totally overbought and have room to the upside for all the indicators that we follow. We are nearing the 50% retracement number on the monthly chart, and suppose that once that number is reached, we will have some consolidation. That number is 597.66. We are above the Ichimuko clouds for the daily and weekly time-frames. So long as the market remains above 545.40, we think that there will be nothing more than shallow retreats. Should the market close below 545.40 for two days, we would believe that we will be in for a retreat to 518. All the indicators that we follow herein are uniformly issuing a continued buy-signal. The 5-day moving average is at 562.66. The top of the Bollinger band is at 580.46 and the lower edge is seen at 542.42. Although we are not totally overbought on the daily chart we are overbought on the weekly and the monthly charts. We closed on the upper edge of the Bollinger band on the daily chart and believe that we will consolidate some of our gains from the previous week. Were it not the end of the month, we would believe that we could retreat, however; given the end of the month, we might not see that retreat until the beginning of September.
Crude Oil rallied for 4 out of the 5 sessions last week. We are overbought and curling over to the downside, indicating that at the very least, we will see some baking a filling. Keep your eyes on the US Dollar for clues regarding crude oil. Further, as the world sees green shoots turning into a crop that will grow, demands for crude oil to fuel this economic rally will continue. Further, we are entering the home heating season which will also be supportive of the crude prices. The 5-day moving average is at 70.95. The top of the Bollinger band is at 74.61 and the lower edge is seen at 64.84. We are above the Ichimuko clouds for the daily time-frame, in the clouds for the weekly time-frame and above the clouds for the monthly time-frame. Thus, we are not below the clouds for any time-frame. We are overbought on all time-frames. When we look at Fibonacci retracement numbers from the high, we see that a 50% retracement will bring us to 89.59. Keep your eye on the US Dollar and on the economic indicators for reaction in crude oil. Look at the Chinese market for their purchases of commodities for clues about their expansion or contraction. It appears to us that the Chinese are putting their cash into purchases of things they will need to expand their country and economies rather than parking the money in US Treasuries. Keep an eye on this ball.
Gold gapped higher in the Friday session never looking back and finally putting itself in position to challenge recent 971.11 August high. The 5-day moving average is at 941.76. The top of the Bollinger band is at 969.02 and the lower edge is seen at 928.09. All the indicators that we follow herein are pointing higher none of which are overbought. So, there is plenty of room to run to the upside. We are above the Ichimuko clouds for the daily, weekly and monthly time-frames. We seem to be consolidating on the weekly and monthly charts and looks as thought we could breakout to the upside. So long as we stay above 923.70 or by Friday, we will remain bullish. As with other commodities, keep your eyes on the US Dollar, any decline will surely rally this commodity as scared money chases the other currency, gold.