Will This August Fit The Recent Pattern?
The S&P 500 broke its five-week winning streak with Friday’s drop of 0.7%, to close down 0.35% for the week. This was in contrast to the 0.80% gain in the small-cap Russell 2000, which was the strongest major average last week. The Nasdaq 100 was only up 0.17%, while all the Dow averages were lower, with the Dow Utilities falling furthest, down 0.73%.
This action is somewhat typical of the August monthly performance for the S&P 500. Since 1950, the S&P 500 has closed August higher 37 times and lower 31 times. The average return has been -0.27%. Since the start of the bull market in 2009, the S&P 500 has been higher in August for only three years: 2009, 2012, and 2014. The S&P 500 has been down in August for the other six years, with several Augusts being particularly rough: 2010 (-5.3%), 2011 (-5.7%), and 2015 (-6.3%).
In 2015, the weekly NYSE Advance/Decline line had been negative since it diverged from prices in May. This kept the market under pressure in June and set the stage for the opening 1000-point drop in the Dow Industrials on August 24th.
In 2011, the weekly NYSE A/D lines made a new high in early July, but had turned negative at the end of the month before the downgrade of US debt in early August. The decline persisted until early October when several of the A/D lines formed positive divergences (Be Bold, Be Fearless…Buy the Dip).
In 2010, the daily NYSE A/D line peaked in April and made a new high, just before dropping below its WMA on May 4. This was the start of a two-month corrective period that dropped the NYSE by 17%. The downtrend in the A/D (line a) was overcome on July 8, 2010 (line b).
The five-week, 13.2% rally took the NYSE into August as the A/D line made a new high on August 9, but then dropped below its WMA on August 11. The following correction lasted just over three weeks, until the downtrend of the A/D line (line c) was broken. On September 8, 2010, I pointed out that the S&P 500 A/D line had made a new high. This was confirmed by new highs in the NYSE A/D line.
I remember this period well, as it was also accompanied by interesting swings in the bullish sentiment % from the weekly American Association of Individual Investor (AAII) survey. On the chart, I have added the bullish% in two-week intervals. On July 1, 2010, the bullish% was at 24.7%, and climbed to 40% on July 29.
On August 12, bullish% was at 39.8%, but just two weeks later it had dropped to 20.7%. This low level of bullish sentiment often coincides with a stock market bottom. As I have mentioned many times in the past, any sentiment readings need to be confirmed by the technical studies before you take action. By September 16, the bullish% had risen to 50.89%.
In last week’s AAII survey, the bullish% rose 7.3 points to 36.4%, as the neutral% dropped 6.2 points. There was only a 1 point change in the bearish% which is still relatively low at 31%.
Global markets like Turkey and China dominated the discussion last week, with very little attention paid to the bond markets or the domestic economy. Last week’s July reading on PPI showed no change, despite expectations of a 0.3% increase. Given June’s increase of 0.3%, July falling short could be significant down the line. The CPI came in as expected.
This week, the latest report on Retail Sales is out on Wednesday along with the Empire State Manufacturing Survey, Industrial Production, and the Housing Market Index. The Housing Starts and Philadelphia Fed Business Outlook Survey come out on Thursday, with Consumer Sentiment and Leading Indicators on Friday.
It will be interesting to see what impact the strong US dollar will have on the economic data in the coming months. It could start to impact earnings by the end of the year. The US Dollar Index was sharply higher last week, which helped push the Turkish Lira and the emerging markets sharply lower.
The US Dollar Index futures (continuous contract) closed well above the highs from the past ten weeks. The weekly starc+ band is at 97.38, with the 61.8% resistance from the early 2017 high at 97.81. There is further chart resistance in the 100-area.
The weekly technical studies have been positive since March 9 (line a), by which point both the weekly OBV and Herrick Payoff Index (HPI) had moved above their WMAs. Both indicators have continued to make higher highs, which is a positive sign for the intermediate term. The daily studies are also positive.
All of the weekly A/D lines are above their WMAs and have recently made new highs. Therefore, there are no signs of a major top. The Invesco QQQ Trust (QQQ) made a new all-time weekly closing high last week at $182.63, but closed near the week’s lows. The March high at $173.71 represents first strong support. The rising 20-week EMA is at $172.52 with the QPivot at $167.84. There is further chart support at $166.66.
The weekly Nasdaq 100 A/D line did not make a new high last week and shows a slight negative divergence. Another week of negative A/D numbers for the Nasdaq 100 could confirm the divergence which would increase the odds of a deeper pullback. The rising 21-week WMA represents good support as does the uptrend (line c). Last week I reviewed a number of the most oversold Nasdaq 100 stocks.
The Spyder Trust (SPY) had a high last week at $286.01, but closed at $283.16, a bit lower for the week. The close was above the 20-day EMA at $282.96, with further support from early August at $279.16. The monthly pivot is at $278.34 with more support at $276.50. The rising 20-week EMA, at $274.62, is 3% below Friday’s close.
The S&P 500 A/D line made a new high a week ago and is still in a short-term uptrend. The important support for the A/D line is at the rising WMA. The OBV made a new rebound high last week, but is still below the high from early in the year. The move in the OBV above resistance (line d) in July was a bullish sign.
The iShares Russell 2000 (IWM) has been in a broad trading range for the past eight weeks. There is support now at $164 (line a) with further support at $161.67-$162 and the rising 20-week EMA. The weekly starc- band is at $159.28 with further support at $157.63 (line b). Resistance is now at $169.87, which was the all-time high.
The weekly Russell 2000 A/D line is rising, but last made a new high on July 6. There is initial support at the recent low and then at the uptrend (line c) and the rising WMA.
What to do? I would not be an aggressive buyer at current levels, in this environment. However, I would add new positions at price levels closer to stronger support. The historical past action in August does make the market vulnerable to a 3-5% correction before the month is over.
With the economy strong and showing no signs that it has topped out, the stock market should continue to perform well. I will be taking some time off until the end of the month but will be updating my analysis on Twitter.
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