The equity markets finished lower for the second week in a row with small-cap and NASDAQ issues leading the decline. Large-cap issues managed to escape most of the carnage with the S&P 500 losing 1.4% compared to the Russell 2000 that plunged 3.50%. The NASDAQ was negatively impacted by heavy selling in biotechnology issues. Biotech had been the market leader in 2015 with gains of nearly 30% at the July peak. The plunge in biotech shares in August and September, including the 6.0% drop last week, is an example of investor capitulation that often occurs near a market bottom.
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It now appears that investor psychology is shifting away from buying the dip which is an important first step in the market eventually finding an investable market low. Considering the seasonal pattern for stocks turns bullish in mid-October and with the three strongest months of the year (November, December and January) just ahead, the odds of a year-end rally are improving.
Very near-term the equity markets are likely to remain in a trading range with further probing of the August lows. Stocks face a number of hurtles as we move into the final quarter of the year. Despite the recent decline, valuation levels remain elevated. This will not likely be resolved with third quarter earnings over the next several weeks anticipated to show an overall decline of more than 3.0%. Although second quarter GDP growth was revised upward, the U.S. continues to suffer from diverging trends and a divided economy.
The manufacturing sector is struggling due to the strong dollar and weakening overseas demand. The service sector is stronger and is benefiting from plunging energy prices and improving labor market conditions. The September Employment Report due Friday, is expected to show the economy generated 210,000 jobs last month with the unemployment rate steady at 5.1%. As a result, consumer market.
The technical condition of the stock market remains fragile. Trend indicators continue to point to a trading range environment but there was noted deterioration in the broad market. Only 53 NYSE issues found new high ground last week while 453 stocks made new 52-week lows versus 260 issues the previous week. In addition, just 21% of the industry groups within the S&P 500 are now in defined uptrends. Most of our sentiment indicators are bullish and show fear levels growing. However, with most areas of the market in gear on the downside, we will need to see sentiment reach more extreme levels before the issued. Entering the fourth quarter the risk is seen to 1865 using the S&P 500 and the reward to 1990.
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** Denotes Current Relative Strength-Based Overweight Sectors
** 1 ranking = strongest sector - 10=ranking weakest sector
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All investing involves risk, including the possible loss of principal; there can be no assurance that any investment strategy will be successful.
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Evan R. Guido
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