It was a good week in terms of unwinding overbought oscillators and for knocking down some of the excessive optimism that has been growing steadily for many months. It reached as high as 29.75, more bulls-to-bears, two weeks back. That’s just not a great number for the bulls, and therefore, for further upside in the stock market. It would be best to continue unwinding some, but at least the market has unwound quite a bit off the top in terms of the RSI, MACD and stochastics. Those numbers have come down quite a bit when we look at the daily index charts. RSI’s were averaging 72 and are now averaging 50/52. Stochastics were near 90 to 95, and briefly even touched the maximum reading of 100, but are now down around the 30 level.
MACD’s have also done some good unwinding off the top. When I look at the MACD’s, it’s not too difficult to envision a little more work to the down side, but it doesn’t have to be more work. You can only stay overbought for so long, and then things need to pull back and for a while. It seemed as if this process would never get under way, but thankfully, we can now say that things are indeed under way. Technically speaking, we are no longer overbought, and we are probably no longer anywhere near too many bulls-to-bears. So from that perspective, we can say it was a good week for the bulls, and the market, even though price moved lower. We can go lower still to unwind more deeply, but we have accomplished quite a bit already.
It’s important to look back on this week from an economic point of view as we had some pretty important reports come out showing the that things are worsening quite rapidly. Month-over-month numbers are quite scary to be honest. We saw durable good purchasing fall off a cliff in a very large way. Minus double digit readings when they were supposed to be near flat. That’s not just getting it wrong, that is simply not understanding what’s taking place on any level. You wonder how the top economists in the world could get the numbers so terribly wrong.
If they’re not seeing the erosion taking place, it makes you wonder what’s behind the fall out. No one seems to know, but Mr. Bernanke probably recognized it without telling us. He implemented QE3, and now we understand why. He saw data coming up that he knew was way beyond bad. With the market doing so well, you had to ask yourself why bother with it now. Now we know why, the deterioration is amazing. Far worse, and faster, than any of us would like to think possible. But it is real, and it is happening. And it appears that we are in trouble from a fundamental perspective. When it will catch up to the market is anyone’s guess. You have to think it will at some point, but we just don’t know when it will happen.
Last week’s numbers are the past. That doesn’t mean we shouldn’t look to the future. That future is as close as Monday as we face the ISM Manufacturing Report, which has showed economic contraction last month with a reading just below the flat line of 50.0. It was forecast to be roughly 52 or 53. A real shocker when it came in at a recessionary number. The market could use some good news on this number. The reading comes out thirty minutes into the trading session. If it’s real bad, you have to wonder how the market would be able to handle it.
Thus far, it has dealt with many poor manufacturing reports lately. Is there one too many that will finally tip the market to the bearish side? I don’t know. but we may have to find out on Monday morning. After the ISM Manufacturing Report on Monday, we have the next hugely important employment report on Friday. That report is basically just as important as the manufacturing report. That story has been worsening as well over the past few months. The market could use some good news there. Let’s hope for the best, but definitely prepare for the worst as the saying goes.
There has been a lot of chatter lately about the disconnect we’re seeing from the transport stocks. The sector has been massively under-performing the S&P 500, and for that matter, the entire stock market. People speak of the Dow theory, where if the transports under-perform, a bear market can be close at hand. You can’t ignore that thinking completely, simply because there is justification for a bear market based upon fundamentals, not only here, but abroad.
They’re even worse in the Eurozone than they are here, and they are really bad here, so yes, you can understand the worry out there. All we can do is watch and wait to see if the transports can bounce back, or if they’re sending out the ultimate red flag. With manufacturing doing so poorly, you can understand the poor performance in the transports as there’s less to haul with prices getting cheaper, due to less and less demand. This must be watched daily for more insight.
Bottom line is we watch the level of support that should ultimately not be broken if things are indeed as healthy as they appear to be on those daily index charts. Using the S&P 500, 1416 is the 50-day exponential moving average. If that gets broken with force and volume, you have to step back and recognize a change in the trend that has taken place, and thus, adjust accordingly. For now, the pullback off the top appears to be healthy in nature, but with all that I’ve spoken about in this newsletter, you can’t let your guard down for a moment.
Peace,
Jack
