Rate Hike Needed to Shake Summer Doldrums

A small interest rate increase in September would most likely revive the sluggish stock market

By Sam Collins, InvestorPlace Chief Technical Analyst


A 6.1% sell-off in the Shanghai market and lower-than-expected earnings from Wal-Mart Stores, Inc. (WMT) resulted in a modestly lower open in New York on Tuesday. By the close, buyers were not able to overcome the early losses and the Dow Jones Industrial Average fell 0.2%.

WMT lost 3.4% as lower earnings guidance for the year gave little hope for a recovery before year end. For the quarter ending July 31, profits fell 14% to $1.08 per share, below management’s forecast of $1.06 to $1.18 a share.

Also in the retail sector, Home Depot Inc (HD) reported better-than-expected earnings, and the stock jumped 2.6%. Overall, retail was mixed. Urban Outfitters, Inc. (URBN) was down 2.1% on a revenue and comparable-store sales miss. TJX Companies Inc (TJX) jumped 7.2% after a glowing quarterly report.

Housing starts rose 0.2% in July to the highest level in nearly eight years, and the sector jumped on the news despite housing permits falling 16.3%.

Gold futures fell 0.1% to $1,117.10 an ounce. Crude-oil futures gained 1.8% to $42.62 a barrel. The yield on the benchmark 10-year Treasury note rose to 2.12%, up from 2.15% on Monday.

At Tuesday’s close, the Dow fell 34 points to 17,511, the S&P 500 was down 6 points at 2,097, the Nasdaq fell 32 points to 5,059, and the Russell 2000 was off 10 points at 1,215.

The NYSE’s primary market traded less than 700 million shares with total volume of 2.9 billion. The Nasdaq crossed 1.5 billion shares. On the Big Board, decliners outpaced advancers by 1.8-to-1, and on the Nasdaq, decliners led by 2-to-1.

SPY Chart
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Chart Key

The most-watched index for technicians, the S&P 500, and its corresponding ETF, SPDR S&P 500 ETF Trust (SPY), appears to have survived a major technical test by reversing in July and August from below the 200-day moving average. In fact, it surprised many with the gusto of its reversals.

My proprietary Collins-Bollinger Reversal (CBR) system clearly shows the strength of the advances. The August reversal, like the one in July, resulted in closes above both the 200-day and 50-day moving averages, preserving an intermediate uptrend and the possibility of a successful attack on the triple-top above $213 (S&P 500 2,130).

Nasdaq Chart
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The Nasdaq’s ability to hold at its midpoint of the March high at about 5,047 is also impressive. And the triple CBR buys are also indications of bullish strength. Like SPY, the Nasdaq’s volume is very low. That and a flat MACD contribute little to our analysis.


Confusion and uncertainty regarding China’s devaluation of its currency have caused doubt regarding a rate hike by the Federal Reserve. And uncertainty is almost never a positive when attempting to chart the course of stock prices, even when the eventual outcome is positive.

Nevertheless, U.S. stocks, as illustrated by today’s charts of SPY and the Nasdaq, are indicating that the bulls are still on the field despite China’s woes, Europe’s weak sisters and Iran’s nuclear threat.

Tuesday’s positive, but not robust, housing numbers and a gradually improving labor market, coupled with the expansion of the services sector, could put pressure on the Fed to raise rates next month. One thing everyone agrees on is the sooner, the better since any move by the Fed in September is almost guaranteed to be very small.

It is the long-term progression of gradual moves, along with a confirmation of that policy by the Fed, which would most likely revive a sluggish stock market. So let’s get on with it, Ms. Yellen, and move forward with the inevitable hike. We need to shake off the summer doldrums.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2015/08/daily-market-outlook-rate-hike-needed-to-shake-summer-doldrums/.

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