17 Oct
Daily Market Commentary

Week In Review: Bulls Not Going Down Without A Fight

SPX- Support Becomes ResistanceOversold Bounce Finally Arrives

The major averages opened the week lower but closed the week near their highs which signals a near-term low may be in place. The small-cap Russell 2000 continues to lead the other popular indexes, both up and down. The RUT actually closed higher for the week and is back above 1082 which was support of its latest base. This is a healthy sign and signals the bulls are doing their best to regain control of this market. For weeks, we have told you that our primary concern is what happens when QE 3 ends. Since the March 2009 bottom, the benchmark S&P 500 (SPX) soared when QE has been in effect and fell -17% when QE 1 ended and fell -22% when QE 2 ended. It will be very interesting to see how the market reacts when QE 3 officially ends later this month (unless the Fed decides to extend QE). Since September 15, a slew of leading stocks, and the major averages, have been acting somewhat sloppy (erratic price swings). Even with all the selling and outright ugly action we have seen in recent weeks, at its lowest, the S&P 500 only pulled back -9.86%, just missing the closely watched -10% decline (which defines a correction) which bodes well for the bulls.

Monday-Wed’s Action: Stocks Hammered

Stocks fell for a third straight session on Monday as investors returned from the weekend still concerned regarding the overall health of the global economy and that Ebola is spreading in the western world. The Dow Jones Industrial Average erased its gains for the year and now joined the Russell 2000 in negative territory for 2014. The S&P 500 and Nasdaq are barely in positive territory. The S&P 500 sliced, and closed, below its 200 DMA line for the first time since November 2012! It also took out support of its large flat top pattern (1904)- Both are not healthy signs.

Stocks fell in heavy trade on Tuesday as energy prices continued to implode and ebola related fear continued to spread. After Tuesday’s close, Intel (INTC) and CSX (CSX) were among two well-known companies that beat estimates. The fear index (a.ka. The VIX) continued to surge as stocks were hit hard. Volatility surged as stocks fell which is typically not a healthy sign.
On Wednesday, stocks opened in what felt like an almost panic-low sending S&P 500 futures in a 68 point range (2x-3x larger than normal).  At one point on Wednesday, the S&P 500 and Nasdaq 100 erased their gains for the year and the small-cap Russell 2000 continued to get hammered. Retail sales slid by -0.3% in September which missed estimates for a decline of -0.1%. The decline was largely due to falling gasoline prices. At one point the DJIA was down more than 400 points (a very large amount for a single trading day) and then the bulls showed up and started buying stocks. By the end of the day, the Russell 2000 actually closed higher and the other popular averages closed near their respective highs. As long as Wednesday’s lows are defended one should expect this “bounce” to continue.

Thurs & Fri’s Action: Stocks Bounce After Fed Says “Easy Money” Here To Stay

Stock rallied on Thursday and Friday as the market bounced from deeply oversold levels. The market turned sharply higher after the Fed made it clear that they are willing to print more money if needed. Jim Bullard, St. Louis Fed President, told Bloomberg News that it might be necessary for the Fed to delay the ending of the asset purchase program (QE) due to the drop in inflation expectations. The comments sparked an immediate jump of 25 points in the S&P 500 (SPX) set the stage for Friday’s large rally. Stocks rallied hard on Friday but the S&P 500 failed to trade above resistance (formerly support). Going forward, the next level to watch is the 200 DMA line and the old chart lows of 1904.

Market Outlook: Bears Getting Stronger

We have been writing for weeks that the market is getting weaker, not stronger. That is exactly what has been happening. We have also noted that the bull market is aging and is now in the process of forming a large topping pattern. At this point, the bulls are not going down without a fight. Keep in mind that the bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). Furthermore, the S&P 500 has not experienced a 10% correction since 2012 which means that each day we get closer to that correction, not farther away from it. Remember a 10% decline from the recent high of 2019 would bring the S&P 500 down to 1817. The low last week was 1820. As always, keep your losses small and never argue with the tape.