STOCK INDEXES STRUGGLE BELOW RESISTANCE LEVELS --YEAREND RALLY IS RUNNING OUT OF TIME -- WHY FALLING COMMODITIES ARE A BAD SIGN
STOCK INDEXES CONTINUE TO STRUGGLE WITH OVERHEAD RESISTANCE... The expected yearend rally has taken major stock indexes up against some formidable overhead resistance barriers. So far, the rally hasn't been enough to reverse the market's major downtrend. While seasonal trends are usually favorable during the fourth quarter, they usually turn more negative during the first quarter. Which suggests that the yearend rally is running out of time.
Chart 1 shows the Dow Industrials trading back below their August peak after briefly exceeding it last week. Its daily RSI line (upper box) and MACD lines (lower box) have started to weaken which suggests loss of upside momentum. Although the Dow remains above its 200-day moving average, it appears to be stalling near its August peak.
Chart 2 shows the S&P 500 falling back below its 200-day line after briefly exceeding it. That has the look of potential rally failure. Its daily momentum lines are also weakening.
Chart 3 shows the Invesco QQQ Trust starting to weaken as well and remaining well below its 200-day line. The Nasdaq remains the weakest of the three major stock indexes.
OIL PRICES CONTINUE TO PLUNGE...One of the most prominent intermarket trends is the continuing plunge in commodity prices, and oil in particular. The daily bars in Chart 4 show Light Crude Oil (through Thursday) falling to the lowest level in a year. WTIC suffered a weekly loss of -10% which is its worst performance since April. It has also given back all of its gains for the year. That's taking a heavy toll on energy stocks (more on that shortly). While falling commodity prices may be signalling some easing in inflation, it's not necessarily a good sign. That's because bonds, stocks, and commodities usually peak and trough in a predictable order. At major peaks in the business cycle, bonds are usually the first to peak as inflation starts to build and the Fed starts raising interest rates. Stocks, which peaked at the start of the year, are usually the second to peak. There again, rising inflation takes its toll on stocks. Commodities are the third market to peak, and usually signal that the economy is entering a recession. That's where we appear to be now.
SECTOR RANKING REMAINS DEFENSIVE...Chart 5 ranks sector performance for the past week. And it paints a defensive picture. The week's top peformers are utilities, healthcare, real estate, and consumer staples. Some of the more economically-sensitive sectors like consumer cyclicals show relative weakness. Energy stocks were the week's worst sector owing to the continuing plunge in energy prices. Falling energy prices reflect falling demand which is usually a sign of economic weakness. The sector ranking in Chart 5 isn't very encouraging and show investors continuing to favor defensive market sectors as weaker economically-sensitive issues reflect loss of confidence in the economy.
