Sideways Action Continues…For Now
The market remains in “wait-and-see” mode as it pauses to digest late August’s steep sell-off and waits for next week’s Fed meeting which will conclude on 9/17. For the week, stocks edged higher but closed in the lower half of their weekly range which is a subtle sign that the bears are still in control. In the short term, the next level of support is 1867 in the S&P 500 and the next level of resistance is 1993. By definition, until either level is breached we expect this sideways action to continue. We would be remiss not to note that the major indices are very extended to the downside and a slight bounce higher should be expected. The inability to “bounce” also suggests how weak the market is right now. We could easily see a “bullish” outcome next week. 1. The Fed does nothing and stocks rally because easy money is here to stay. 2. The Fed raises rates by a quarter point (which is really symbolic in nature) and stocks rally because that is already “priced in.” Meaning, late August’s sell-off priced in a Fed hike. We don’t believe the Fed will raise next week but of course we know anything is possible. Defense is king until the S&P 500 trades above 2040. Until then, the path of least resistance is down and if 1867 is breached we have to expect another big leg lower for stocks.
Monday-Wednesday’s Action: U.S. Markets Relatively Quiet
Markets in the U.S. were closed on Monday in observance of the Labor Day Holiday. The “good” news was that international stock markets (specifically China) did not crash on Monday or Tuesday. That was a big concern ahead of the long weekend in the U.S. The absence of bad news was considered good news and that paved the way for a nice 300 point open to the upside on Tuesday. The G-20 ended their meeting over the weekend and said they are committed to global economic growth. The “big” news came from China which said their stock market correction was likely over. Chinese authorities have spent nearly $236 billion propping up their market since the rout began three months ago. In related news, trade data from China fell by 5.5% from a year earlier in dollar terms. That was the latest data point which suggested the china slowdown remains a concern. Japan’s Nikkei stock market erased its gains for the year after the country said the economy slid by -1.2% in Q2 putting the country in a recession. Euro-area growth grew by 0.4% in Q2, beating estimates for 0.3%.
Stocks opened higher on Wednesday after markets overseas soared. The Nikkei 225 Stock Index surged +7.7% to 18,770.51 in Tokyo, posting its largest one day gain since October 2008! The Tokyo Stock Exchange reported a huge increase in short selling since September 1. The report showed short-selling accounted for 40% of trading since September 1 which is the highest proportion since the exchange started keeping records in 2008. The big rally came after Japanese Prime Minister Shinzo Abe reiterated his pledge to cut taxes by 3.3% from Japan’s 34.62% corporate tax rate in 2016. China’s stock market also rallied on hope for additional stimulus. Speaking after markets closed, Chinese Premier Li Keqiang said that China will be able to maintain mid-to high-speed growth. In the U.S. Apple held its latest event which occupied the headlines for most of the day and announced a few new products and new iPhones and iPads.
Thursday-Friday’s Action: Stocks Quiet Ahead of Fed Meeting
Stocks were relatively quiet on Thursday as overseas markets remained relatively calm. Initial jobless claims slid to 275k for the week ending September 5 from a downwardly revised 281k. Overnight markets were relatively quiet with the big news coming from Japan. Investors believe the Bank of Japan (Japan’s central bank) will increase its QE program when they meet next month. Elsewhere, Goldman Sachs ($GS) lowered their target for Crude Oil to $20/barrel citing a supply glut. Remember their last big bold forecast for oil came in early 2008 when oil prices were surging! The investment powerhouse said oil will go to $200/barrel but their call was ill-timed and came right before oil topped out and then plunged from $149/barrel to $33 in a few months. Right now, oil is in a steep bear market and it has already plunged 60% in the past year. It would be “funny” if this call comes near a low for oil.
Market Outlook: A Major Top?
Every bull market in history has a definitive beginning and an end. It is important to note that with each day that passes, we are getting closer to the end and further away from the beginning. This bull market is aging by any normal definition and celebrated its 6th anniversary in March 2015. The last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam’s commentary/thoughts on the market. Join FindLeadingStocks.com.