Friday’s weaker than expected jobs report appears to be providing investors with a sigh of relief, as the prospect of higher rates momentarily dims. The shift has resulted in a weaker dollar and higher commodity prices, which are releasing pressure in financial markets. Junk bonds have rallied from their lows, as have emerging markets.
As you can see in the chart below, US stocks followed international markets higher yesterday. The pushing out of interest rate hike expectations spurred a global rally and allowed some emerging market currencies to gain against the dollar, a positive development for those companies that have issued dollar denominated debt.
Early last week the S&P 500 tested the August 24th and 25th intraday and closing lows and the index held above that support. Since then, the market has rallied sharply. We now find ourselves bumping up against significant overhead resistance (chart below).
The two prior short-term rallies topped out (on a closing basis) at 1989 and 1995 (horizontal lines below). In the same vicinity, we have a declining 50-day moving average that sits almost exactly at the psychological 2000 level.
If the S&P can break above the 2000 mark, it will be a technical win for the bulls. This would clear the way for a move back up into the prior trading range that characterized most of 2015. Because the recent low on September 28th was higher than the previous low on August 25th, it would also put the large cap index back into an upward trend of higher lows and higher highs.
The setup in the Industrials and Transports looks similar, but with some subtle differences. The top chart below shows the Industrials already climbing above their prior high and attacking the 50-day MA. Again, because the recent low was higher than the August 25th low, the Industrials are signaling a shift in momentum to the upside.
So far the Transports (lower chart above) are confirming in essence, but not yet in price action. The Transports did set a higher low, but they have more room to climb to better the mid-September high. If they can rise above 8215, it will mark a transition back towards bullish price action.
While it’s hard to argue that the price movement over the past six weeks is indicative of the Primary Trend, one could suggest that the Transports rising above 8215 would represent a short-term Dow Theory bull signal. As this point both the Industrials and Transports would have reentered periods of rising prices and confirmed each other by rising above their prior respective highs.
[Read: What’s Bugging the Transports?]
If you’ve been following my commentary lately then you’re probably well aware that most of the trouble we’ve seen has been dollar and commodity related. As we saw in the last jobs report, the primary areas of concern were mining and manufacturing. If you take a look at 3rd quarter earnings estimates, you’ll find that yes, overall S&P earnings are expected to decline, but that’s primarily a result of energy (earnings expected to decline 64.6%) and materials (earnings expected to decline 15.4%). These are the latest figures from Thomson Reuters.
The chart of the CRB commodities index, shown below, highlights why mining and materials companies are having such a difficult time: the prices of their core products have plummeted. But there are some signs that commodity prices could be stabilizing.
Looking at this weekly chart, we see that the RSI is moving out of oversold territory, and did not drop as far into oversold territory on the most recent bout of weakness. We also see the MACD ready to exhibit a bullish crossover. And in the blue oval, we can see that buyers and sellers have been relatively evenly matched over the last few weeks.
Whether commodities can gather some strength will depend heavily on how the dollar trades moving forward. But one thing is certain: at this point higher commodity prices would remove a major source of uncertainty from the markets. So keep your fingers crossed (unless you’re short).
The preceding content was an excerpt from Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
