MARKET ENDS WEEK ON A QUIET NOTE -- PULLBACK IN CRUDE STABILIZES MARKETS
SHORT-TERM MARKET TREND IMPROVES ... After a turbulent week dominated by Hurricane Katrina, the stock market appears to be ending the week on a more positive note. Wednesday's upside turnaround was the most important day of the week. As Chart 1 shows, the S&P 500 moved back above its 50-day moving average on Wednesday on the heaviest volume in weeks. That a positive combination. In addition, the stochastic lines turned positive from oversold territory below 20. The slower MACD lines haven't turned positive yet, but appear close to doing so. The stock market gained strength from a late pullback in energy prices and market talk that the Fed may halt its rate-hiking campaign. That doesn't tell us too much about the market's long-term trend. But it does tell us that things are beginning to stabilize a bit over the short run. While energy stocks pulled back on Friday, a weaker dollar continued to push money into gold and gold stocks. Gold may be one of the biggest beneficiaries of this week's developments. A weaker dollar should also make foreign markets more attractive to global investors. Not surprisingly, consumer discretionary stocks (like airlines, autos, and retailers) bore the brunt of the hurricane. A lot may depend on their ability to stabilize as well. Financial stocks got a little boost from a widening in the yield curve. It's not clear, however, how long that will last. After things settle down a bit, the market will still have to deal the same problems it hard before. Like a weakening uptrend.
Chart 1
WEEKLY INDICATORS STILL LOOK TOPPY ... The two weekly indicators below carry good and bad news for the market. The bad news comes from the fact that the weekly stochastic lines have turned down from overbought territory over 80. So we have daily stochastics turning up and the same time that weekly stochastics are turning down. In my view, the negative reading on the weekly chart suggest that any upside bounce probably won't carry that far. Generally speaking, weekly signals carry more weight than daily signals. The good news is that the weekly MACD lines didn't give a major sell signal. The two lines have been converging and are now touching each other, but haven't crossed. The late week bounce kept the uptrend intact -- even if just barely. Another piece of good news this week was the ability of the S&P 500 to bounce off its (red) 40-week moving average. It would have to break that long-term support line in convincing fashion to signal a more serious downturn. Putting the daily and weekly charts together, I suspect the market will experience a short-term relief rally. I remain concerned, however, that market risk will increase as we move further into the autumn.
Chart 2
LET'S NOT FORGET THE HUMAN TOLL... Somehow it doesn't seem right to focus solely on market matters without some mention of the tremendous human suffering caused by the hurricane. Getting help to people in need is obviously the highest priority right now. The fact that we're heading into the Labor Day weekend should give everyone else a chance to relax after a trying week. Hopefully, the situation in the Gulf region will look better by next week. Marketwise, things should also start getting back to normal as traders and investors return from vacations. At that point, we'll be able to get better read on the market situation.
