Here’s The Outlook For The Overall Stock Market
The major indexes gave back some of their gains from
recent weeks, as continued rising bond yields finally started to stir
up some concern. Equities traded with an upward bias in the first 3 days of the
week, but things changed on Thursday. The combination of what appeared to be
upside exhaustion and a rally in the 10-yr note seemed to be behind the sudden
change in sentiment. To top things off, many retailers reported disappointing
same store sales. Financial and Homebuilding shares were the downside leaders,
which should come as no surprise with the action in the bond market, while
strength was seen in Energy shares. Overall, it appeared as if we’re finally
seeing our long overdue correction.
The
September SP 500 futures closed out the week with a loss of -7.00 points, while
the Dow futures posted a larger relative loss of —108 points. On a weekly
basis, both contracts broke the past 2 weeks of dojis, with the ES posting a
bearish engulfing line and the YM posting a market structure high, but are still
holding their 10-day MAs as support. Looking at the daily charts, both
contracts broke the bottom of their trading ranges, and confirmed their
short-term tops. On an intraday basis, the 60-min inverted cup and handles
broke and finished again with bear flags. For you daily 3-Line Break followers,
the ES broke short with a new Break Price of 1247.75, while the YM broke short
with a new Break Price of 10717.
                   
Recently,
we have seen renewed strength in the economy and perhaps more importantly, the
revaluation of the Chinese Yuan. In addition, other countries, such as Russia
have announced that they would be diversifying away from their U.S. Dollar
holdings. The combination of these factors is the real reason behind the rally
in long-term rates. The economy still appears solid at the moment thanks to
continued robust activity in the Real Estate and Lending sectors. At the same
time, the recent action appears to be a warning sign of what higher long-term
rates could mean to the economy down the road. Of course, the Fed could stop
raising rates at any time, and thus the entire outlook for the stock market
would change immediately. This doesn’t appear to be the case, however, as Mr.
Greenspan has a habit over overdoing things and the Fed Funds Futures are
starting to call for 4.25% short-term rates by early 2006, which would amount to
3 more rate hikes. Once again we appear to be at a crossroads where market
players are worried about the Fed overdoing their tightening campaign.
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Please feel free to email me with any questions
you might have, and have a great trading week!
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