US Equity Markets Primed for a Bounce?

US equity markets declined for the 5th consecutive session Monday leaving the S&P 500 with YTD gains of less than 1%.

Who can blame investors for starting the week in a sour mood?  They were greeted on the East Coast before the sun came up with not only the largest 1 day decline for the Chinese stock market since 2007, but with yet another day of delays on NJ Transit trains, topped off by 90°to 95° heat and humidity on tap through at least Thursday.

Where’s the flag for unnecessary rudeness?

How We Got Here:  Yes, the Shanghai Composite was down 8½% overnight coming into Monday morning, but we can’t blame this all of the decline of the last 5 days on China.

The first 2 weeks of earnings season has been less than inspiring to say the least, with the disturbing trend of companies “managing” to beat their earnings estimates, while missing on revenues, keeps popping up again and again and again.

Even a 20% jump Friday by AMZN after blowing the doors off the street consensus with a +$0.19 profit couldn’t halt the selling at the end of last week.  Of course the offset to AMZN was a 20% drop from Biogen in the previously white hot biotech sector, rekindling fears that valuations there are priced for much more than perfection, with a best case M&A premium baked into way too many names.

With the FOMC 2 day policy meeting starting today, let’s take a close look how the major market averages are set up with 4 trading days left in the month.

The S&P 500 at 2067 actually held its morning lows and rallied off the 200 Day MA of 2064.  Just 2 weeks ago the S&P 500 tested the 200 day MA for 3 days before rallying up to the seemingly “impossible to get through” resistance level of 2130.

With the FOMC policy statement hitting the wires at 2:00 PM tomorrow, we’re perfectly set up for at least a “bounce” off support, but we might not get back to 2130 this time.

US Equity Markets

The DJIA at 17440 closed at its lowest level in 5½ months and is now down 2.1% YTD.  The DJIA has been under the weight of a rough earnings season for IBM, UTX, DOW, and the curse of AAPL being a recent inductee.

NASDAQ at 5039.47 has not been a place for the faint of heart to start the 3rd Quarter. After closing at 4909 on July 8, the NASDAQ rallied 6.3% over the next 8 trading days while clearing fresh all time highs on both July 17 and 20.  In the last 5 days its retraced 58% of that move.

Clearly the move to new NASDAQ highs was fueled by sharp rallies in GOOG, AAPL, AMZN, NFLX, FB.   The leadership of the NASDAQ and S&P 500 rally has become so concentrated in maybe a dozen names the last  few weeks it’s been highlighted almost daily in the financial media of late.

Let’s see if it remains this pervasive should we get a relief rally this week.

Market internals continue to be heavily skewed to the negative as declining issues led advancers Monday by 2½ to 1 on both the NYSE and NASDAQ.   Internals have been so consistently negative all month, I feel it supports a trading rally this week.

Internals are more oversold short term than market averages, and just to be clear, I’m talking about a 2 to 3 day trading rally, not a decisive move to new highs on all major market averages.

The tipping point may be the new 52 week highs and lows.

On Monday we had  475 new 52 week lows and only 18 new highs.    That’s the most negative reading since the bottom of the October 2014 sell off.    At the lows last October we had consecutive days of 600 new 52 week lows on October 15 and 16 which set the stage for an 11% rally in the S&P 500 over the next 5 weeks.

With the FOMC meeting today through tomorrow, their policy statement tomorrow afternoon and the last day of the month on Friday, it’s a perfect set up for a relief rally, except for of course that now I’m in print calling for it.

tanderson@mndpartners.com tjanderson56@gmail.com

Twitter: @TJAnderson1

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