"The reports of my demise are greatly exaggerated"Is September a replay of August or do the "Ides of September" come to pass? Just like in August everyone was calling for the market to drop and now the skeptics will proclaim doom for September. The numbers do not back up another 9% or greater correction like we last saw in June/July.
The market call below is driven via Erlanger Chart Room. If you are not a client and you make investment decisions, then spend some time with our approach.
First the bias of the market is established. Then sentiment is reviewed. Third seasonal trends are noted. Fourth market timing tools from Phil Erlanger are reviewed. Next performance of the Russell 2000 to the S&P 500 is compared with breadth measures.
The process is rounded out with sector analysis of what is and is not working. Asset classes within the U.S. are compared against the world. The net result is a cohesive process that avoids making emotional decisions not ground on the facts. Numbers do not lie.
The bias remains positive. The S&P 500 is above its DMA channel on a daily basis, above it weekly and monthly. The Erlanger Trend Direction (ETD) is in uptrend on a daily, weekly and monthly basis. The one hitch here is the Erlanger Nantucket Sleigh Indicator (ENS) is in some trouble on a daily basis but weekly and monthly look great. The NASDAQ Composite looks to be in good shape but has a few more chinks in its armor. The daily ETD is struggling as is the daily ENS. The S&P 500 is leading the NASDAQ as of this update. The Russell 200o is still outpacing the S&P 500. No worries here in reviewing these indicators.
The prior reporting period saw short interest rise nicely. This has failed to confirm with the last two releases. Shorts covered and did not press their bets two periods ago and just and some shorts on an absolute bias but more stocks saw short covering than additions. This is not a surprise as the market motored the last two weeks of the month of July and continued its advance the first two weeks of August.
The fuel for a rally has been drained a bit here with the lack of shorts being led to the slaughter. I love the term "smart shorts" because the reality is they never make as much money as those on the long side. Somehow they are smarter than those long.
Call action has yet to reach an extreme as money is blindly bet on calls. There is more call action in equities versus indexes. We need to see the indexes get a little jiggy as well. Sentiment will not help the market continue to plug higher. It looks like the bulls will have to throw more money at the stocks they love.
The worst of the seasonal cycle lies ahead in September and the first half of October. The brief respite of positive seasonals played out perfectly on the S&P 500. However, the seasonals require some caution as it can be hard to make money during this period as the legislative branch of the government returns and corporate chieftains come back from the beach to tweak their business models. Also, mutual funds decide which dogs to sell for tax losses as their fiscal year ends on September 30th.
Erlanger's market timing tools the EBB and Squeezeometer remain in pretty good shape. The EBB is close to breaking below 0 on a daily basis. This could be another indication of sideways action. However, it is too early to reach a firm conclusion. Additionally, there is a negative divergence here that needs to be rectified.
The Russell 2000 (small cap) continues to dust the S&P 500 however it is slowing a bit at this juncture. In periods of market weakness, the S&P 500 takes control. It should be noted this has yet to happen.
Market breadth remains positive although the second derivate is starting to slow on several fronts. In particular, the Daily Advance/Decline Line and the Daily Advance/Decline Volume Line are struggling a bit.
There has not been a great deal of sector leadership change. What brought the market higher remains strong. Although technology, needs to be watched closely to make sure that its leadership position does not falter. The semis broke out above $25 today and some say this is a top and that Intel rung the bell. Such skeptics will feel the pain as the SMH runs to $27.50 without resistance. The sector technicals remain in good shape. Concern will arise when and if defensive sectors begin to perform. These include Utilities, Food/Beverage/Tobacco and Food/Staples Retailing.
In terms of assets classes stocks are doing well as are treasuries. Investment grade bonds are strong as are high yield. Mature overseas markets are strong while emerging is struggling just a bit here. The daily ETD is in pullback mode. A couple of weeks ago we noted that, "It looks like China is going to slow their growth a bit and kick start it later in the year when the world needs it more than right now." this is now widely known and it was not then. As such energy and materials are struggling a bit. The surprise in mid August had been the strength of the U.S. dollar which reversed course and fell over the cliff. This allowed equities to rock the second half of the month. The dollar should struggle as the reflation trade kicks into gear. As a result, the commodity patch cannot begin an uptrend until dollar weakness becomes more pronounced. IN OTHER WORDS IT IS ALL ABOUT THE DIRECTION OF THE DOLLAR. No bear can hope to make money if the dollar is weak. It is a matter of physics.
In the past few days, the equity market of several countries have begun to weaken and they include Malaysia, Taiwan, Mexico, South Korea, Brazil, China, India, Israel and Turkey. Themes here are pretty obvious. Countries with heavy commodity exposure are struggling while those ties to China are also failing to see more upside. This was the same motif in the last update.
That about wraps up the current state of things. Remain long and add to weakness. Shorts use tight stops unless you want your face ripped off and I would welcome this given the long bias. The uptrend is not complete. The bulls remain in control until as such time as data confirms trouble on the horizon.
