On Friday, stocks sold off for the entire day in response to uncertainty emanating from Washington, D.C. Volume resulted from the quadruple witching expiration of September stock options, index futures, single stock futures and index options, but volatility was low.
The House of Representatives passed a bill to fund the government through the end of this year. But it contains a provision to defund Obamacare, and thus is unlikely to pass the Senate or defeat a presidential veto.
And the Federal Reserve again became a source of confusion for investors with statements from several Fed presidents expressing differing views on tapering. St. Louis Fed President James Bullard said that tapering could start as early as October, while Kansas City Fed President Esther George said that the Fed should have started cutting in September and feels that it lost some credibility by not doing so.
At Friday’s close, the Dow Jones Industrial Average was off 185 points at 15,451, the S&P 500 fell 12 points to 1,710, and the Nasdaq lost 15 points at 3,775. The NYSE traded 2 billion shares and the Nasdaq crossed 994 million. On the Big Board, advancers exceeded decliners by 2.6-to-1, and on the Nasdaq, advancers were ahead by just 1.1-to-1.
For the week, the Dow was up 0.5%, the S&P 500 rose 1.3%, and the Nasdaq gained 1.4%.
This chart is similar to Friday’s chart of the S&P 500, which shows a bullish long-term uptrend with minor “corrections,” which are actually just “adjustments,” from the May and August highs.
Note that the steep angle of the September advance is similar to that of the April-to-May advance, and much like the June-to-July advance before prices flattened out in mid-to-late July.
Momentum and MACD are overbought and sagging. And the Relative Strength Index (RSI) is high and turning down; however, it did confirm the new high at a level of 72.13 versus 70.10.
The Russell 2000 represents a broad base of small-cap stocks. Note the tight, orderly bull market channel that began last November. But there are some concerns. RSI is lower on the new high versus the high in July — a “non-confirmation” of the new high. However, the other internal indicators are supportive of a move higher. Immediate support rests at the conjunction of the 20-day and 50-day moving averages, with major support at the intermediate trendline at 1,025.
Conclusion: Last week, the market survived the latest Federal Reserve surprise. The Dow Jones Industrial Average hit another new high, the S&P 500 rose to record territory, and the Nasdaq reached its best levels since September 2000.
But it seems unlikely that the S&P 500 can sustain a run to another new high before testing support at 1,672 to 1,679 (20-day and 50-day moving averages), and perhaps even the intermediate trendline at around 1,650. Our internal indicators are overbought, and RSI on the leading index, the Russell 2000, flashed a “non-confirmation” of the new high.
Despite the Fed’s surprising decision to continue buying bonds in September, sources at their regional banks say that the Fed will soon taper, QE will end, and interest rates will normalize.
Currently, equity values are slightly overbought, so investors need to adjust their valuations downward before the Fed’s next announcement. As they used to say in the old Western movies, “Meanwhile, back at the ranch…” it’s back to buying growth on pullbacks that land on support and staying away from income substitutes except where real growth is coupled with income.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.