Is the trend changing or is upward move just a bounce?
The past couple of sessions have finally provided investors some needed relief. Now the only concern is whether the market will make a significant upward move or whether we will see just a a short-term move followed by a more serious correction.
One of the reasons the markets stopped their steep slide is that corporate earnings reports for the second quarter have been coming in and some have been better than expected. Wall Street was especially relieved to see Wells Fargo exceed expectations because the banking sector has been hammered. But it is too early to get excited about these early reports. The majority to companies have yet to provide information about their second quarter performance and many are likely to have been hurt by rising costs.
Of the many economic fundamentals that impact the financial markets, perhaps the most important are consumer confidence and consumer spending. Consumer spending is the engine that drives the U.S. economy. And while consumer spending rose in June, most of that was attributable to tax rebate checks.
The latest Consumer Confidence Index released at the end of June by the Conference Board showed the fifth lowest reading ever. It seems unlikely that consumers will gain much optimism until prices moderate and home values stabilize. The next Consumer Confidence Index reading will be announced July 29, but there is no reason to anticipate a significant increase. Here is the link for the most recent report: http://www.conference-board.org/economics/ConsumerConfidence.cfm
My best guess would be that this latest move is just a short-term bounce and that stocks will resume their downtrend soon. The chart below shows Nasdaq price movement over the past year. You can see that this latest downward move ended at the same level as in March. I added two lines to the chart to show where I think it is most likely that this advance will peak. The gold line on the top chart is a 50-day moving average. I suspect the Nasdaq will advance back to its 50-day moving average but fail to penetrate it, which means the advance will stall at about the level marked by the green line. If it somehow manages to break through that level, it would meet strong technical resistance at the level marked by the blue line–where it peaked in May and early June.
The bottom portion of the chart is a Moving Average Convergence Divergence (MACD). Notice that the MACD has begun to move upward. In a normal cycle it should reach overbought levels about the end of August. Obviously there is no guarantee that the cycle will be normal. But right now there is nothing technically or fundamentally to indicate that the market is on the verge of a sustained advance.
We’re officially at the mid-point of the summer season. I hope you are making the most of this wonderful time of year.
F.S.
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