After a big bounce in the stock market Thursday and Friday (well
over 2 standard deviations for a two-day period using a VIX of 18),
most economic and market bears are ready to give up.
And I include myself in that camp of carnivores having an
existential crisis, especially since I believe that most of the
time "price precedes fundamentals."
Despite the weak economic data and the deterioration in earnings
and corporate outlooks, the bulls have had control of this market
since the June bottom. It was their game to lose and they almost
gave it away with three big sell-offs in the past 5 weeks.
But they just solidified their firm grip by making a last ditch
effort and launching off of support near S&P 1330 Thursday,
making highs not seen since early May. All the while, in the big
cap indexes at least, it was a tale of higher highs and higher
lows.
Now, the market will probably rest and consolidate for the last two
days of July as players anticipate potential central bank rhetoric
and actions from both the FOMC and the ECB on August 1st and 2nd.
So it's a good time to look at some price charts which describe
what this market has overcome and accomplished to see if the bear
case should be put to rest or not. Most of these snapshots were
taken in the last half hour on Friday and not much has changed as
the indexes closed near their highs.
This is the chart formation I showed two weeks ago in
3 Charts You Need to See
. Then I said you could call this pattern a rising wedge or a bear
flag, but regardless of the name, the bulls were still in charge.
I also said that as long as the bulls could defend 1330, then they
had a good shot to trade to the top of the price channel near 1390,
where new levels of resistance would come into play. Taking out
1375 finally and decisively after two previous failed attempts
gives the bulls additional strength here.
This is the S&P 500 Equal Weight Index, which removes some of
the distorting effects of mega-cap stocks on price. When I showed
this chart two weeks ago, the 50-day (blue) and 200-day (green)
moving averages had not yet made their "death cross." Also, in the
mid-July rally (week of the 16th), the SPXEW went up and made a
lower high in that rally.
Today, it has taken out that high, but still not the early July
one. The one bit of good news here for this version of the index,
which again displays more breadth than the conventional market-cap
weighted one, is that it has gotten out from under its 200-day
moving average. It was spending so much time below it that I
thought for sure we were headed for a bear market.
Here we have the weakest look at the breadth of the US equity
markets via the NYSE Composite Index. Note how this one had its
bearish "death cross" of the 50 and 200-day early in July. And it
has spent more time and price below its 200-day moving average than
any broad index.
Now, not only has the NYSE overtaken its 100-day moving average
(red), it is threatening new highs in July. Will this reversal of
fortune stick a fork in the bear case? We won't know until we see
follow-through (or not) next week. But the final chart I want you
to see is an internal look at the strength and weakness of the NYSE
via a proprietary measure of institutional buying and selling that
offers some clues about the recent trend.
This comes from a trading service called StockTiming.com, which
offered this "Accumulation or Distribution" view of Thursday's
closing data as a courtesy. It is still useful without Friday's
price and volume data because these trends persist and even if it
reversed Friday, understanding how this indicator works provides
important insight about the market.
The folks at StockTiming say their chart "net's out the amount of
Daily Buying and Selling by Institutional Investors. The value of
this is that it tells you whether they are in Accumulation or
Distribution." Clearly, the big boys and girls have been in
Distribution since the swing high of July 19.
While they will not share their proprietary indicator again for
free until mid-August at the earliest, my guess is that it will
show a reversal of the Distribution trend. Here's a close proxy
with Friday's data using the Chaikin Money Flow indicator.
Conclusions: The bulls have achieved a big victory this week. For
short-term traders who don't concern themselves with ideas about
economic fundamentals, just following price and volume trends has
paid off.
For those of us who do get hung up on fundamentals and wonder if
price is acting as a leading or lagging indicator right now, we are
watching two things: (1) how markets react to next week's central
bank musings, and (2) if price resistance holds or if new highs are
made.
Since the S&P is only 30-some points (2.5%) from new highs,
it's a critical decision-time for an investor-trader like me who is
long-term bullish (new all-time highs in 2013), but short-term
bearish (new lows for 2012).
For now, I am going to hang on to my ideas and view this price move
as one last gasp of the 2012 bull market. I figure the 3% of upside
I might miss will a take a week or so to unfold and that will give
me plenty of time to research and re-chew my stance.
Kevin Cook is a Senior Stock Strategist with
Zacks.com
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