Evan R. Guido
The stock market experienced a modest pullback last week that was likely the result of an overbought condition. The downside reversal mid-week following good news from the Federal Reserve Board on the economy, inflation and interest rates could be an early indication that stocks are vulnerable to a more significant correction.
The weight of the technical evidence, however, continues to argue that stocks are on firm ground. Investor optimism is muted, there is no sign the broad market is deteriorating or an indication that some sectors are diverging that typically precedes a top. The bottom line is that despite a healthy technical backdrop, stocks have been rising for seven consecutive months, which is a rare occurrence, suggesting investors attempt any new buying only on periods of weakness.
Investor optimism that had been creeping into the stock market suddenly halted last week. The most recent survey from the American Association of Individual Investors (AAII) shows a drop in bulls to 39% from 42% the previous week. The outright bears jumped to 45% from 37%.
The fact that the bears now outnumber the bulls in the AAII survey is mildly bullish. The latest reading from Investors Intelligence, which tracks the opinion of Wall Street letter writers, shows a decline in bulls to 46.7% from 47.8% the previous week. The bears among the advisory services remained unchanged at 24.7%. The advisory service data is considered bearish.
The CBOE 10-day put/call ratio remained unchanged last week at 81%, a neutral reading (75% is considered bearish and 95% bullish). The CBOE 5-day equity put/call ratio climbed to 61% from 54% the previous week and remains on a short-term sell signal (62% is considered bearish and 77% bullish).
The most recent data from the Investment Company Institute shows net outflows from equity mutual funds this year, which is surprising, and shows unusual skepticism with stocks at new recovery highs. Most of the money being pulled from money market funds is going into bond funds.
The economic reports last week were mixed, but on balance show the economy continues to crawl out of recession. The Leading Economic Index (LEI) rose in August to its highest level since January 2008. In addition, the July LEI number was revised upward.
Initial unemployment claims dropped to the lowest level in more than two months last week suggesting Friday's labor report could show another decline in the number of job losses. Consensus estimates are that the economy shed 180,000 jobs in September with the unemployment rate up-ticking to 9.8% from 9.7% the previous month.
In separate reports, sales of existing homes fell for the first time in five months in August, but inventories also dropped to the lowest since the second quarter of 2007. Durable goods orders fell an unexpected 2.4% last month. The second drop in three months.
Fresh economic data due this week including the report from the Institute of Supply Management (ISM), consumer confidence for September, and consumer spending are anticipated to offer a favorable view of business conditions, which could help support the equity markets.
No. 1 Information Technology = Strong RS - Overweight/buy. Groups expected to outperform: Semiconductor Equipment, Computer Hardware, Internet Software & Services and Data Processing Services
No. 2 Industrials = Large jump in RS - Marketweight/buy. Groups expected to outperform: Capital Goods, Environmental Services, Railroads, Construction & Engineering Services and Office Services
No. 3 Consumer Discretionary = Strong RS - Marketweight/buy. Groups expected to outperform: Manufacturing- Home Building, Household Appliances, Education Services and Manufacturing and Consumer Apparel
No. 4 Financials = Falling RS - Marketweight/hold. Groups expected to outperform: Insurance - Property & Casualty, Asset Management & Custody Banks and Regional Banks
No. 5 Materials = Decline in RS - Overweight/hold. Groups expected to outperform: Diversified Metals & Mining, Specialty Chemicals and Gold Mining
No. 6 Consumer Staples = Improving in RS - Underweight/Hold. Groups expected to outperform: Soft Drinks, Personal Products and Brewers & Vintners
No. 7 Energy = Declining RS - Marketweight/hold. Groups expected to outperform: Oil & Gas Drilling, Oil & Gas Exploration & Production and Oil & Gas Integrated
No. 8 Health Care = Improving RS - Marketweight/buy. Groups expected to outperform: Biotechnology, Health Care Equipment & Services and Pharmaceuticals
No. 9 Utilities = Declining RS - Underweight/hold. Groups expected to outperform: GAS Utilities, Electric Distributors
No. 10 Telecom Services = Deteriorating RS - Marketweight/hold. Group expected to outperform: Wireless
Short-Term Trading range with risk to 995 and reward to 1085 on the S&P 500
Intermediate-Term Trading range with risk to 920 and reward to 1100 on the S&P 500
Long-Term Major support at 825 on the S&P 500 - Reward to 1150 on the S&P 500
Strongest Sectors Information Technology, Materials and Consumer Discretionary
Leadership Mid-Cap & Small-Cap Growth
Fed Action Fed expected to hold course well into 2010
Treasury Yields Treasury Yields 10-year Treasury yield next six months 3.25% to 4.00%
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