The expected 0.75% increase by the FOMC last week instead of reassuring investors caused them to sell more stocks. It was the so-called dot-plot expectations that rates would reach 4.25-4.50% by year-end and move even higher in 2023 that panicked the market. It dashed the remaining hopes that the FOMC would stop raising rates and therefore increased recessionary fears.
These fears were not helped by Thursday’s Conference Board Leading Economic Index as their Senior Director of Economics Ataman Ozyildirim commented “The US LEI declined for a sixth consecutive monthly potentially signaling a recession”. For a full discussion of how the LEI readings often have predicted past recessions, I suggest you read the excellent research in Advisor Perspectives.
But stocks were not the only market that saw heavy liquidation as crude oil futures dropped 7.1% for the week. Many traders decided that the increased odds of a recession would crush demand for crude oil around the world.
The continuous crude oil contract peaked at $130.50 in March and then rallied back above $123 in June before reversing to the downside. Since early July crude oil has closed below its 20 week EMA every week. This resistance now stands at $92.14. There is next strong support, line a, in the $66.49 area that also corresponds to the weekly starc-band. A drop to this level would certainly dampen the inflationary fears in the months ahead.
The on-balance-volume (OBV) dropped below its WMA and support, line b, the week of July 15th It is still declining and negative. Since the early 1980’s I have relied on the Herrick Payoff Index (HPI) as a key indicator in determining the direction of commodity prices. The HPI is simply a mathematical method of measuring the money flowing in or out of a commodity by computing the difference in dollar volume each day. This is accomplished by using the volume, open interest, and price data.
By mid-July, the HPI, line d, had dropped below the zero line reversing the positive signal from the start of the year. The WMA of the HPI is also below zero which is consistent with a further decline. Though lower crude is likely to cause more selling in the very popular oil stocks it also should relieve some pressure on other stocks like the airlines.
The Energy Sector Select (XLE
The weekly technical indicators turned negative last week. The relative performance (RS) has dropped below its WMA suggesting that XLE is no longer leading the S&P 500. The OBV is also below its WMA and a drop below the support at line c will indicate heavier selling.
None of our monitored markets were as weak as crude oil or XLE last week. The iShares Russell 2000 was down 6.5% followed by a 5.4% drop in the Dow Jones Transportation Average. The benchmark S&P 500 was down 4.7% just barely weaker than the Nasdaq 100 ($NDX) which has been leading the market lower. $NDX is down 30.7% year-to-date (YTD)
The Dow Jones Industrials lost 4% for the week while the Dow Jones Utility Average was 3.4% lower. Even gold was weak as it declined 1.8% and it was one of the four markets I suggested you watch in August.
The weekly market internals were some of the most negative I have ever seen as on the NYSE there were 392 issues advancing and 3088 declining out of a today of 3564. Therefore 89% of the NYSE Composite were lower for the week.
The Spyder Trust (SPY
) had a low last week of $363.29 as the June low of $362.17 was not broken. The weekly starc-band was violated last week and for the week ahead it is at $357.43. The completion of the flag formation, lines a and b, has measured downside targets in the $340 area. This is 7.6% below Friday’s close.
The reversal in the S&P 500 Advance/Decline line last week spelled trouble for the markets as all of the weekly and daily A/D lines are negative. Of the advance/decline lines that I follow only the S&P 500 A/D line is still above the June low, line c. On a short term basis many A/D oscillators are quite oversold.
Aside from very oversold readings for several indicators and a high level of bearishness, there are few positive factors to strongly suggest we are at an important low like there were in June-July. In Friday’s action 33 million puts were bought according to Bloomberg, the most ever. The parabolic rise in yields has helped to fuel the selling but yields are quite extended, and a pullback is likely this week.
Many advisors and money managers have favored energy stocks this year because of their valuation and high yields. This makes these stocks more vulnerable in a sell-everything market like we saw last week. Heavy selling in the energy stocks could further demoralize an already beaten-down market.