7/29/2015: Dow 17751.39 | S&P 2108.57 | NASDAQ 5111.73 | Russell 2K 1229.60 | NYSE 10883.91 | Value Line Arith 4664.05
Psychological: Nervous. For this first time in months,
Investor’s Intelligence has reported bullish advisors at less than 50% for five straight weeks. Bearish advisors are still the minority as formerly bullish advisors have begun to swell the correction advisors ranks, now at 39.2%. China’s stock market bursting is also a real-time reminder of just how quickly and violently a bear market can be. It has also been nearly four years since the last 10% S&P 500 correction. Add in mixed data, a Fed promising to raise rates and weak seasonal forces and there are plenty of good reasons to be cautious.
Fundamental: Tepid. Although Q1 GDP was revised higher earlier today, Q2 came in below expectations. According to
S&P Capital IQ, corporate earnings declined 0.94% in Q2 compared to year ago. A first blush the labor market appears reasonably healthy with a headline unemployment rate of 5.3% and initial weekly jobless claims are hovering around 40 year lows, but a lot of the improvement in these numbers is due to a substantial shrinking of the labor force. The housing market recently had a few cracks appear, new home sales were a disappointment and inventories of new homes have risen briskly. An interest rate hike could easily cause significant damage to the fragile housing sector recovery.
Technical: Range bound. Thanks to a few heavy hitters within the NASDAQ it continues to creep slightly higher and has the healthiest chart. S&P 500 and Russell 2000 have remained range bound. DJIA is the weakest of the lot. Since its last new all-time high in May, DJIA has fallen into a bearish pattern of lower lows and lower highs. If NASDAQ breaks down, DJIA, S&P 500 and Russell 2000 will likely be in real trouble. Current support levels are DJIA 17400, S&P 500 2036, NASDAQ 4900 and Russell 2000 way down near 1150, its January low.
Monetary: 0-0.25%. Even after this week’s FOMC meeting, we are all still left guessing when the first rate hike will take place. Some believe this September, others this December and some not till next year. After today’s GDP report, real money bets, based upon 30-day Fed Funds Futures traded at the CME, are more heavily favoring September. Perhaps, but there are still two months of data between now and then. What’s the first move likely to be? It could be as small as just dropping the current range of 0 to 0.25% and going to a flat 0.25%. It would be a tiny step toward tightening, but at the same time highly unlikely to disrupt much and it would buy the Fed another a month of data. It truly is hard to imagine the Fed being too aggressive with rates especially when they are still rolling over and reinvesting principle and interest payments on their current holdings.
Seasonal: Bearish. August is the worst DJIA and S&P 500 month from 1988-2014 with average declines of 1.1% and 0.8% respectively. It is also the worst month for NASDAQ (–0.1%) and second worst for Russell 2000 (–0.5%) over the same time period. In pre-election years since 1950, Augusts’ rankings improve: #5 DJIA, #6 S&P 500, #8 NASDAQ (since 1971), #8 Russell 1000 and #9 Russell 2000 (since 1979).