EDITOR’S NOTE: Serge Berger is filling in for Sam Collins today. Sam will return (tentatively) on Thursday.
What started out as a hopeful day for the bulls on Tuesday, following the initially positive reaction in S&P 500 futures overnight after the first presidential debate turned into yet another lackluster trading session … which however did close in the green.
In the bigger picture, stocks continue to hang in there, but since they ultimately won’t be able to escape economic reality and gravity, it should not be surprising that the S&P 500 is still trading in a sluggish way. Today’s trading session will be littered with no less than six Federal Reserve speakers, which has more than a few fund managers I spoke with on Tuesday sitting on the edge of their seats.
Over the past few weeks — and indeed since the second half of the summer — I have received my fair share of emails from subscribers voicing their ‘boredom’ with this stock market. And their feeling is not without merit, for while the S&P 500 rallied sharply off the January/February double bottom, it is showing essentially flat performance since early June, late October 2015 and even late 2014.
Most ‘boring’ of all, the S&P 500 as represented by the exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is essentially unchanged since the early July breakout.
From where I sit and as it relates to U.S. stocks specifically (although this applies to other risk assets as well), this market remains buoyed up by dovish central bank statements and ultra-low interest rates. And while this has acted as a support mechanism of sorts, the reality of slowing U.S. economic growth for the better part of the past year and a half is also keeping a lid on the broader U.S. stock market.
As a result, while stocks have continued to marginally push higher, this price action is far from a strong bull market.
As a side note and something that I continually reiterate to my students and subscribers, most investors are not aware that a) most stocks tend to move up and down together and b) that markets tend to move sideways 80% of the time. In other words, when things are slow or ‘boring,’ patience is being tested most.
By my count investors have recently become rather disinterested in the stock market, and usually when I see this level of disinterest a better volatility spike is just around the corner.
Looking at the chart of the SPY ETF, we see that while the early July breakout did push the index out of a bigger picture consolidation phase, it is now retesting this previous resistance area again — around the $213/$214 area.
Given the increasing negative divergences I am seeing across the equities landscape, however, and where this July breakout was not supported by new upside momentum, we may also consider that the entire rally off the January/February lows took the shape of a rising wedge (red-dotted lines), which would ultimately argue for a better corrective move lower in coming weeks.
We likely won’t be able to tell what the path of least resistance is until either we see the SPY break below $212.50 or comfortably above $219.
One group of stocks that I always pay close attention to is the semiconductor stocks as represented by the PHLX Semiconductor (INDEXNASDAQ:SOX). On the above chart, we see that after the initial rally off the February lows, the SOX has moved higher in a series of five so-called waves.
Without going into any ‘wave count theory’, after five up-waves, rallies tend to get exhausted. On the SOX chart, we can see that the latest rally or ‘wave’ higher has come on decelerating upside momentum and which, if compared with price, we can label ‘negative divergence.’ This type of price/momentum relationship usually does not bode well for price.
Semiconductor stocks look to be overshooting and overstaying their welcome and in my eye are best not to be chased higher at this juncture.
In conclusion, while the U.S. stock market has been especially boring for the past few weeks and months, investors and traders alike must keep in mind that just when the boredom barometer seems to blow is usually the time to remain patient and get ready to sit up and take notice. While a year-end and post-election rally does stand a good chance, so too does some seasonal October volatility.
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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.