Morning Cup of Jo: To Worry or Not To Worry
Why is it as soon as there is some resolutions to the issues at hand, others immediately take their place?
- Last week's economic data (CPI, PPI) suggested to some cause for optimism regarding the Fed's inflation fighting efforts. That, coupled with hope for an end to fighting between Hezbollah and Israel led to a four day rally.
- This action occurred on light volume and there are still grounds for pause on the technical front.
- The DJIA stands in the best shape technically as money has moved to large cap defensive names. This index, along with the S&P 500 (SPX), shows an inverted two headed monster pattern.
- The more speculative complexes, including the technology laden Nasdaq and the Russell 2000, still have some work left to do if they are to play catch up.
To worry or not to worry – this continues to be the question.
Why is it as soon as there is some resolutions to the issues at hand, others immediately take their place? Over the last couple of quarters the market has focused on two main issues – interest rates (to combat inflation) and geopolitical issues (Israel and Hezbollah). Last week these issues were put on the back burner with the advent of the most recent economic data and a peaceful resolution to the fighting. The CPI and PPI data last week hinted that the Fed's string of rate increases may be curtailing the inflationary pressure which sent the 10-year yield south to 4.83%. As for the equity markets, the two eldest sisters (the Dow Jones Industrial Average and the S&P 500) have come off their most recent reaction lows and retraced most of the losses since the April breakdown. At the same time the two youngest technology laden sisters haven't been as constructive for the bulls and have yet to retrace their losses from April. However, the four day rally last week did manage to restore some of the losses since their June/July drop.
Nonetheless, this week the markets have now replaced the aforementioned concerns with two others. First, the words "possible recession" are beginning to surface more so than prior all because of the same slowing economic numbers which just tamed the inflation fears last week. Second is Iran's new propaganda regarding its nuclear stance.
As spoken about in prior Jo's, there is plenty of resistance to contend with at these levels for all the sisters as we enter the worst time of the year for the markets historically (Sept. /Oct.). Let's take a look.
DJIA (Dow Jones Industrial Average): For once the DJIA looks the best technically of the four, even though there are some conflicting signals. Last week it completed an inverted "two-headed monster" (a head and shoulders bottom with two heads) as the NYSE (New York Stock Exchange Composite) A/D line broke out to new highs. Conversely the Stochastic and RSI have begun to show a divergence as the breakout volume left something to be desired.
The SPX (S&P 500): As for the second in line, it has the same technical pattern, volume and stochastic contradictions.
NDX (Nasdaq 100): Moving onto the smaller ducklings, the NDX, even with last week's spike, remains below ST resistance (1,585) and begs the question of whether or not she's going to retest 1,520 and fill the gap created last week. However, even if it fills the gap and goes topside of 1,585 the major resistance remains at 1,630.
RUS (Russell 2000): The RUS, which I plugged as the one in the best technical shape in the last few Jo's, has been somewhat of a disappointment. Even with the run in equities last week, this poor small-cap sister was left gasping for air as tides rose for the others.
Overall, the last couple of months have demonstrated volatility not seen in 30-years. All the same, the markets recent fluctuations have been on light volume as a function of the typical summer doldrums and light trading desks. We continue to follow the setups as the markets enter a seasonally weak period with great inquisitiveness. Recapping the technical view…
- The DJIA remains in the best shape for the first time in a while as money has flowed into larger cap, more defensive issues in light of significant underperformance of much of the technology sector and overall market uncertainty.
- The SPX remains above the recent support as well as tracing out an inverted head and shoulder bottom pattern with two heads.
- It is also true that liquidity on a global basis has been tightening and one of the areas this typically manifests itself is in the action in the smaller cap names. This development bears further monitoring and is a likely reason for the underperformance of the Russell 2000. This follows the probable global shift in risk toward aversion. The same follows true for the Nasdaq which has also failed to move in lockstep with the DJIA and the SPX.
The question now is whether the larger cap equities drag the mid and small caps higher or vice versa. Only time will tell. As for now, with the bulls having the upper hand, the technical probabilities lie with a possible move higher after Labor Day when the institutions return from the Hamptons. Two factors need to occur for the bulls not to lose their current advantage… large accumulation volume needs to penetrate the markets with the two youngest sisters breaking topside their 4-month downtrends. If not, well let's just say the markets will continue their whipsaw action.
Stay tuned & good luck!
Until next time...
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