All major U.S. indices closed higher for the third consecutive
week, led by the Dow Jones Industrial Average, which was up 2%.
Year to date, by far the strongest major index has been the
tech-heavy Nasdaq 100 (NDX), which is up 12.8%. This leadership
by technology has been a key catalyst in the 2014 broad market
advance, helping the S&P 500 post a 7.6% gain despite a weak
small cap sector. This strength in tech must continue to keep the
broader market headed higher.
From a sector standpoint, last week's advance was led by
financials, industrials and consumer discretionary, but all
sectors of the S&P 500 ended in positive territory.
Key Indices Held Major Support Levels in
Many key indices, including the S&P 500, Dow Jones
Industrial Average and PHLX Semiconductor Index, have rebounded
nicely from major support levels that were tested during the
first week of August, and finished last week at or near their
The SPDR Dow Jones Industrial Average (NYSE:
), which I first mentioned as a potential buying opportunity in
May 12 Market Outlook
, closed out last week 3.7% above its Aug. 7 test of its 200-day
moving average, a widely watched major trend proxy, and less than
1% below its July 17 all-time high of $171.32.
Although I remain cautiously positive on DIA heading into this
week, I am still apprehensive about its more intermediate-term
sustainability due to frothy investor sentiment (see
), weak August-to-September seasonality (per the
), and major overhead resistance in the market-leading Nasdaq
Technology Faces a Formidable Challenge
The next chart plots the Nasdaq 100 monthly since 1994, and
shows that Friday's 4,053 closing level positions the index just
2.3% below its 4,147 September 2000 high.
Major benchmark highs like this one are seldom meaningfully
and sustainably broken without at least a multi-week corrective
decline first. So, especially considering that technology issues
have led and fueled the 2014 broader market advance, I am
watching the Nasdaq 100's reaction to 4,147 as a potential
coincident or leading indication of an upcoming market
Bearishness in Europe Could Spread to Our
Another potential pothole to be aware of this quarter is
European stocks, which are positively correlated to the S&P
500 and whose economies have much more to lose than the United
States on any further geopolitical tensions in Ukraine.
The next chart shows that, unlike the major U.S. indices, the
iShares MSCI Germany (NYSE:
) recently declined below its 200-day moving average and its Feb.
3 low, indicating an emerging major bearish trend change.
Moreover, the 50-day moving average (minor trend proxy) crossed
below the 200-day, which I view as more evidence that a tangible
bearish shift in intermediate-term price momentum has
Considering EWG closely tracks Germany's DAX index, and that
the DAX has maintained a positive correlation to the S&P 500
for the past 25 years, this suggests that either the 25-year
correlation has suddenly become irrelevant, or one of these two
indices is temporarily mispriced. I'm inclined to go with the
latter, and more specifically, I think Germany is better
handicapping upcoming economic and/or geopolitical risk in Europe
that will eventually have an adverse effect on the U.S.
U.S. Bond Market Isn't Enthusiastic Either
Recent apprehension in the U.S. bond market appears to be
increasing. In the
, I pointed out that the 2-year/10-year yield curve had flattened
below its March 2012 steep (meaning wide) extreme at 200 basis
points (bps), saying, "This clears the way for an additional 15
bps of flattening to the next key level at 180 bps." I also
pointed out this was likely to coincide with a decline in the
yield of the 10-Year Treasury note.
The next chart shows that the curve has since flattened to 187
bps. Meanwhile, the yield on the 10-year note has coincidentally
declined to as low as 2.3%.
A flattening yield curve amid declining long-term interest
rates suggest that the typically prescient bond market sees some
economic trouble/weakness ahead, which I view as another good
reason to watch the Nasdaq 100's reaction to 4,147 overhead
resistance during the next several weeks. Last week's flattening
in the curve clears the way for at least an additional 7 bps move
to the next key level at 180 bps.
Putting It All Together
Many key U.S. stock indices tested, held and aggressively
rebounded from major support levels earlier this month, which, at
best, means that investors still collectively believe the market
is headed even higher this year and, at the least, indicates that
the "buy the dip" mentality is alive and well as managers remain
terrified of missing the next quantitative easing-fueled leg
I am still cautiously positive on this market on a near-term
basis, but I also believe investors need to be acutely aware of
potential problems ahead due to a number of things including
extreme bullish investor sentiment, an historically weak
August-to-September period, an emerging bearish trend change in
the German stock market, and falling long-term U.S. interest
Considering these factors, I would view the Nasdaq 100's
inability to rise and hold above overhead resistance at 4,147 as
a good reason to more aggressively protect profits on long
: One way to add some protection now while still participating in
any potential upside is to "rent" your stocks for extra monthly
income. If you're not familiar with Amber Hestla's
service and want to learn how you could earn an extra 9%-plus
monthly income from the stocks you already own,
This Week's News
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.