This weeks economic reports were better than expected. Housing sales increased, but so did supply. Housing prices continued to decrease, but not at the rate of recent declines. Q2 GDP was revised to +3.3% from +1.9% on inventory buildups and exports. Consumer confidence improved, probably due to the upcoming presidential elections. Inflation, as measured by the core PCE remained steady. The market responded by staying within its recent upper range 1263 – 1301, and ended the week lower. For the week the SPX/DOW were -0.70%, and the NDX/NAZ were -2.50%. Bonds gained 0.6%, Crude added 0.8%, Gold nudged 0.2% higher, and the Euro was down 0.7%. For the month of August the SPX/DOW gained 1.35%.
LONG TERM: bear market
The bear market from the October 2007 continues to unfold as expected in price. However, we are noticing that the most recent waves are extending in time. The bear market started with a series of relatively quick waves, one month apart, into the March 2008 low at SPX 1257. From that point forward the waves of similar degree extended in time to two months apart. Specifically, the first serious of waves, from the Oct 2007 high unfolded: Nov-Dec-Jan-Feb-Mar. Since then this next series of waves unfolded from that March low: May-July-and now possibly Sept. Prior to the March low, the FED was in its standard mode of operation. After the Bear Stearns bailout in March, the FED went into overdrive. Opening its discount window to not only banks, but brokers and GSE’s as well. In addition it started "Treasury for Debt" swaps of varying terms to firm up the capital needs of these financial entities. Since then the FED has put up about 80% of its balance sheet to support the financial sector. And, the character of the equity bear market changed, the bear market decline has slowed down.
There are some who are forecasting a total collapse of the financial system in the near future. We do not see this occurring, at all. The equity market is a forward looking measurement of mass psychology. If a total financial collapse was in the making the markets would be projecting it already. They are not. In fact, this Cycle wave bear market has been relatively mild as compared to the Cycle wave bear markets of recent history: 1937 – 1942, and 1973 – 1982. And, it is certainly extremely milder than the last total financial collapse during the 1929 – 1932 Super cycle bear market. During that financial collapse, the first wave down took two months and the market lost 50% of its value. After that, every downtrend took between two and four months, and the market lost between 30% – 40% of its value each time. The current bear market has already had four downtrends of one to two months each, and has not lost more than 15% at any one time. Mass psychology is certainly not projecting any sort of financial collapse. Just the typical Cycle wave bear market.
MEDIUM TERM: uptrend still in place
After the July downtrend low at SPX 1200 was put in place by FED action, and the SEC’s temporary ban of naked short selling of the finanicals. The market started to uptrend. The low ended Intermediate wave A of the next leg down in the bear market, Major wave C. The current uptrend is being labeled Intermediate wave B. Since Intermediate wave A declined from SPX 1440 – 1200, we expected a typical bear market retracement between 38.2% and 61.8%. This projected upside targets at SPX 1292 (38.2%), 1320 (50%) and 1348 (61.8%). Since we have SPX pivots at 1287, 1316, 1327 and then 1344, the retracement levels fit. The market rallied to 1291 (1287 pivot) within the first week of the uptrend. Then pulled back to 1234 in the next week before rallying to 1313 (1316 pivot) two weeks later. The following week the SPX tested support at the next lower pivot 1261, and held. A rally followed to the 1287 pivot, then turned over to retest the 1261 pivot again this week. Holding that important support pivot again, the market rallied to 1301 on thursday before pulling back on friday. As mentioned above the waves appear to be extending in time, while still reaching the anticipated price levels. When the SPX first hit 1313 the market appeared ready to head lower. The financial sectors were heading lower, the housing sector was weakening, the SPX/DOW were turning over, and we were only awaiting the techs to follow. Since then, two weeks ago, the SPX has found support at 1261, the finanicals have stabilized, housing has moved higher, and the techs have been in a trading range. This all indicates that this uptrend may not be over, and that the recent low at 1261 may be the B wave of this ABC uptrend. If this is the situation this uptrend could continue to the 1316, 1327 or even 1344 pivot. Until the SPX breaks below the support pivot at 1261, this uptrend can continue to chop its way higher over time. When that break does occur, the uptrend is likely over, and the next wave down in this bear market should be underway.
Support for the SPX is now again at 1261 and then 1240, with resistance at 1287 and then 1316. Short term momentum was reaching oversold levels on friday, while the near term indicators pulled back to neutral. From the SPX 1313 high two weeks ago, the pullbacks to 1261 simply look like a small abc, not a wave one. Also on our daily charts, we have not seen any indication of the beginning of a new downtrend at the recent lows. This uptrend is beginning to look like the wave structure of Mar-May two month uptrend. But on a smaller price scale. As long as the SPX 1261 pivot holds, the uptrend continues.
The Asian markets are beginning to display a bit more strength. Yet, most still remain in downtrends.
The Europeans markets remain in uptrends, and the FTSE made a new uptrend high this week.
The Commodity equity markets are still in downtrends, but Canada is trying to reverse that.
Bonds gained 0.6% this week, but we continue to see a negative divergence building as this market gets overbought.
Crude gained 0.8% this week after holding support at the $112 level. The rally thus far looks choppy and not impulsive.
Gold gained 0.2% this week after holding support recently at the $778 level. This rally looks a bit more impulsive.
The Euro lost 0.7% this week and a positive divergence, from oversold levels, is forming.
Tuesday kicks off the week wth ISM and Construction spending, maybe Auto sales as well. Wednesday is Factory orders; then ADP employment, Q2 productivity and ISM services on thursday. Friday Non-farm payrolls to end the week. The FED kicks off its week on monday with a speech from FED governor Kroszner in Argentina. Then wednesday the Beige book at 2:00. Best to your holiday weekend!