MARKET ENDS SEPTEMBER ON A STRONG NOTE -- PULLBACK IN ENERGY COMPLEX HELPS
MARKET AVERAGES CLOSE BACK OVER 50-DAY LINES... The market had a lot thrown at it this month. A spike in energy prices, plunging consumer confidence, and rising long-term interest rates. It also had the month of September to deal with which has traditionally been the worst month of the year. While the market bent a bit during the month, it refused to break. And then ended the month on the upside. The first three charts show essentially the same pictures. The three major market indexes held support at their late-August lows and closed the week back over their 50-day averages. [The S&P and the Nasdaq also stayed over their 200-day averages]. That action prevented a chart breakdown and has kept the market in a trading range. This week's bounce also kept weekly and monthly indicators in positive territory. Part of Friday's market gains were probably the result of falling energy prices. Some other positive signs were new signs of strength in small caps, the Nasdaq, semiconductors, and the transports. Chart 3 plots a ratio of the Nasdaq 100 divided by the S&P 500. The ratio peaked in early August when loss of Nasdaq leadership started to weigh on the entire market. The good news is that the ratio started to bounce again this week (see arrow). The market usually does better when the Nasdaq shows upside leadership. A lot of the Nasdaq leadership came from the semiconductors.
Chart 1
Chart 2
Chart 3
SEMICONDUCTORS ARE DOING BETTER ... The Semiconductor (SOX) Index ended the week back over its 50-day line. That's a good sign. Maybe even more important is the upturn in the SOX:S&P ratio below the price bars. The ratio bounced off its mid-August low before turning up. The reason that's important is because chip leadership is a positive sign for the technology sector and the market as a whole. New buying in small caps also helped the market regain its footing.
Chart 4
SMALLER STOCKS REGAIN LEADERSHIP ... One of the hallmarks of the bull market has been leadership in small and midsize stocks. The next two charts, however, show that smaller stocks started to fall behind larger stocks in early August which threatened the ongoing uptrend. By week's end, however, the S&P 600 Small Cap Index and the S&P 400 Mid Cap Index were back over their 50-day lines. Their relative strength lines jumped as well.
Chart 5
Chart 6
TRANPORTS HIT MONTHLY HIGH ... One of the biggest technical concerns during September was the relatively week performance by the Dow Transports. The index spent most of the month trading beneath its 200-day moving average. That situation changed for the better this week. Although most of the buying came from the rails during the week, a late rebound in airlines (possibly due to weaker oil) helped push the transports back over moving average lines and to the highest level in a month. That moves this key index out of immediate danger.
Chart 7
NOW FOR OCTOBER ... With the market having survived September, attention will now turn to the difficult month of October. And for good reason. Some of the market's worst drops have taken place during that month. It's also true, however, a lot of important market bottoms have taken place during October. One positive factor worth knowing is that crude oil has a history of turning lower during October. That may warrant some profit-taking in an overbought energy patch. Any hint of an energy pullback could get the market through the most dangerous part of the coming month. Seasonal trends turn more positive during November and December. I can't say that my longer-term outlook on the market has changed much. I remain negative on the outlook for 2006. However, there may be room for a fourth quarter rally between now and then. With the market having survived the recent energy spike, my guess is that it could react quite favorably to any energy pullback during October. At least that's the message I took from this week's positive market action.
