Things Remain Mixed

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The market worked higher again last week. Cyclical stocks led the way. Cyclicals move higher ahead of better economic numbers. All the headlines suggest our, and everyone else’s, economy is falling off a cliff. The market tends to know a heck of a lot more than the guy that writes headlines.

Why do we put so much faith in people that do not know really anything about the market? Who writes the headlines that scroll across the screen on Yahoo finance? Do we know the background of the people that write the scripts on financial news TV? I was told, nearly promised, by those headline writers a while back that second quarter earnings were going to be awful and the market would sell-off. Usually that sort of pessimism from a contrary indicator leads to higher prices. It happened again this year. Quarterly earnings have come in better than expected in the face of some pretty negative news from Europe.

The technical side of the picture improved last week. 61% of the stocks in the S&P 500 are in either basing or advancing stages. That reading improved 6% last week. The advance was led by energy and other cyclical stocks. The question is, will these stocks provide new leadership or will their move be short lived? That is something I will be watching carefully over the coming weeks.

There is a negative divergence developing in the market. The small cap Russell 2000 index has not moved above short term resistance. I have used 822 as the level that will point to continued strong action in the market. I also gave 800 as a level that will give us some insights as to the potential for the Russell to test resistance. On the downside 796 is the area of support the Russell needs to maintain to keep the technical picture on a short term positive. We are testing the support levels for the Russell as I write. Short-term support levels for the S&P 500/DOW/NASDAQ/Russell 2000 are 1393/13,090/3600/790. If all four of those levels give way then the next correction will likely set in. If some but not all of those levels give way then the latest positive divergence will set in and the markets will again move higher. Short-term resistance numbers are 1409/13,220/3030/808.

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About Thomas J Smith CFA