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Equity Markets to Track Higher in September Before Election Correction


The stock market continues to track the typical election year chart pattern.


Last week, however, the under-invested crowd got a break as the SPX snapped its six-week winning streak. This should have come as no surprise after the SPX's first attempt to travel above its April highs failed. As stated, it usually takes two, or even three, attempts before a successful upside breakout occurs.

Also, as anticipated, the pullback was shallow, indicating the bulls are still in control; and while the momentum has been lethargic, there are no clear-cut bearish divergences that typically occur at topping formations. Indeed, at a "big top" the Relative Strength Index (RSI) will diverge and fail to confirm new reaction highs in the broad averages.

Furthermore, the leading stocks continue to lead. Typically, if a top is forming, the leaders lag and the laggards lead and that is just not happening. All said, the picture looks pretty good with the stock market's daily internal energy level back to a full change. That puts the SPX in great position to vault above the 1420 – 1422 level and keep pushing higher.

As for my comments on gold last week, gold looks to have broken out to the upside, and in the process has traveled above its 200-day moving average. To me, this looks like the start of a move higher and not the end of a move. Coincident with gold's upside breakout, Credit Suisse penned a report on Freeport-McMoRan Copper & Gold (FCX) with a favorable rating. The report's byline reads, "The cheapest growth stock in our universe."

The call for this week: Hurricane Isaac blew into the Gulf, but is having little effect here in Tampa. Still, like a snow day up north, the schools are closed and the Republican National Convention is taking the day off. The stock market, however, is not as it continues to track the typical election year chart pattern, as can be seen in the chart below from the good folks at Bespoke. If the correlation continues to hold, the equity markets should track higher into the beginning of September before giving us a more substantial pre-election correction.

No positions in stocks mentioned.
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