Stocks continued to shuffle moderately higher Monday ahead of what will be a week filled with big retail earnings and minutes from the FOMC’s latest meeting. Investors will analyze every word from the Federal Reserve for hints as to when it will raise rates.
Fed fund futures currently assign about a 50% probability of a September rate hike and more than a 70% chance of a hike in December. A different picture emerges from the analyst community, however, where 70% to 80% of them expect a rate hike in September.
Homebuilder confidence as represented by the National Association of Homebuilders housing market index came in at 61, a nine-year high. This is more of a lagging indicator but confirms the rally in housing stocks we have seen year to date.
The small-cap Russell 2000 and tech-heavy Nasdaq led Monday’s rally as most indices closed near the top of their daily ranges.
I often discuss that the Russell 2000 can be used as a leading indicator as to the near-term direction of the broader market. One way to gauge this is by looking at the relative picture, i.e., the ratio chart of the Russell 2000 versus the S&P 500.
So far in 2015, the ratio has oscillated back and forth along with choppiness in the stock market, but note that the relative weakness of the Russell 2000 since late June has found support in the blue zone and could begin to bounce again. If the market rallies into month end, then the Russell 2000 could very well outperform the S&P 500 but might not be able to shoot to new highs as may be the case with the S&P 500.
Last week, I discussed that the Russell 2000, despite breaking below its 200-day moving average, still held its blue horizontal line, which likely carries more weight. With Monday’s bounce the Russell 2000 bumped right into its 200-day from below. A move back above it could get some short sellers scrambling to cover positions, i.e., accelerate the upside push.
For perspective allow me to once more reiterate my three reasons for why stocks could continue to rise into late August:
- Seasonal strength in mid- to late August;
- A tendency for stocks to rally into monthly options expiration (with the next being on Aug. 21); and
- Overly bearish investor sentiment.
Thanks to Wednesday’s V-shaped bullish reversal, i.e., last minute save, traders now have a defined line in the sand around 2,050 to 2,060 on the S&P 500 to use as the stop-loss area.
The S&P 500 further confirmed Wednesday’s lows as the index broke past diagonal resistance from the July highs. Perhaps this options expiration week can indeed once more reward the bulls with a push toward 2,130 to 2,150.
In the energy market, WTI crude oil traded at $41 on Monday, the lowest level since March 2009. The United States Oil Fund LP (ETF) (USO) has now reached the lower diagonal support line connecting the January and March lows, and the selling since late June has been persistent and relentless. The next bullish reversal day will likely offer a trade higher for active investors.
Conclusion
Monday’s advance increases the likelihood of the summer-end rally I have discussed. Retailer earnings and Wednesday’s FOMC minutes have the potential to throw a wrench into this rally. However, all else being equal, a slow melt-up into Friday and potentially the end of the month looks to be the path of least resistance for the S&P 500.
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.
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As of this writing, Serge did not hold a position in any of the aforementioned securities.
