MARKET STAGES LATE TURNAROUND TO END AUGUST ON UPNOTE -- BUT SEPTEMBER IS NEXT
AUGUST ENDS ON UPNOTE... After trading lower throughout most of the day, late buying pushed the market into positive territory -- thereby ending the month on an upnote. Volume remained below average. Chart 1 shows the S&P 500 closing a shade above its 50-day moving average. It remains beneath its 200-day line. The bad news is that three of its top percentage gainers were in the oil service group. Strangely, energy was the day's strongest sector. Other sector winners were utilities, basic materials, and healthcare. Bank stocks also had a strong day -- as did REITs. That's in keeping with recent market leadership by rate-sensitive stock groups. Gold stocks also closed strong as gold and most commodities rose.
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GOLD CLOSES OVER $412 AS DOLLAR DROPS ... Earlier today we showed the Gold/Silver (XAU) Index consolidating just beneath its 200-day moving average. The XAU is drawing strength from rising gold and a weaker dollar. Gold closed just over $412 today as weak economic news pushed the dollar lower. That puts bullion back over its July peak at $410. Chart 3 shows the daily chart of the U.S Dollar Index, which usually trends in the opposite direction of the gold market and commodities in general. The dollar fell sharply today after pulling back from chart resistance along its summer highs. Any continued weakness in the dollar should support more buying in gold and gold shares. Gold isn't the only commodity to bounce today. Twelve of the seventeen commodities in the CRB Index rose with the CRB gaining over three points. Chart 4 shows the CRB moving up near a three-month high. That's giving a boost to basic material stocks.
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BUYING BASIC MATERIALS AND BANKS ... Chart 5 shows the Materials Select Sector SPDR in the process of challenging its summer high. This index of commodity-related stocks benefits from rising commodity prices such as aluminum, copper, gold, silver, and steel. We recently talked about new interest in bank stocks as the result of falling interest rates. Chart 6 shows the Bank Index hitting a new recovery high today after recently breaking through its June high. What do the two have in common. Banks benefit from falling rates. Basic materials benefit from a falling dollar which is also the result of falling rates. Two other rate-sensitive groups that hit new highs for the year today were utilities and REITS.
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HEADING INTO SEPTEMBER ... The good news is that the market had a pretty decent August although light turnover showed a general lack of interest. The bad news is that September is next. Although seasonal patterns aren't our primary concern, it's worth noting that September is traditionally the weakest month of the year. Market bottoms are usually formed during October which usually leads to a strong fourth quarter. We're not slaves to seasonal patterns although we've learned not to ignore them. Our primary concern is the combination of price and volume action. Price action improved during August, but volume didn't. If the market can get both going on the upside, we'll turn more positive on market direction. Seasonal odds usually favor a strong fourth quarter. The problem is we have to get through September first.
