Technicals, Fundamentals Remain Weak
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The Puetz crash cycle we warned you about a few weeks ago worked like a charm.
That window was at its peak July 5 through today. However, Steve Puetz, the man who discovered the solar-lunar eclipse cycle's link to market crashes, said the stock market remains vulnerable to a crash or panic through July 17.
The combination of a solar and lunar eclipse occurs about once a year, far more often than genuine market crashes. However, it has produced a strong sell-off every time it has appeared in the last three or four years. That's not enough data to satisfy a statistician, but it sure makes it worth keeping an eye on. A second Puetz cycle (a solar eclipse followed within six weeks by a full moon) will occur July 30-August 7.
On Friday, the Dow and the S&P 500 both came close to the downside targets identified by breakdowns out of head and shoulders tops in mid-June. Those breakdowns gave the S&P downside potential to 1175, the Dow to 10,300, and the Nasdaq to 1872. However, as we pointed out at the time, the head and shoulders is a major reversal pattern, which mean the indexes could continue well beyond those targets.
The market made a nice recovery attempt before turning back down, but it never looked bullish, which was one warning sign. The S&P (see chart below) broke its downtrend line off the May 22 top, but never got back above the head and shoulders neckline (for the Nasdaq, the reverse was the case: it got back above its neckline, but never broke its May downtrend line).
On Friday, the S&P filled a breakout gap from mid-April at 1191, not a great omen for the broad market, because there are less significant gaps all the way back to the lows. However, the S&P could still find support at 1182-1183, the top of its first wave up; below that level, a retest of the lows appears likely. But that support is higher than the 1175 downside target identified in mid-June, and the index broke down out of a two-month trading range on Friday, both potential signs that the downtrend is not complete.
Sentiment at the moment is mixed. The put-call ratio is above .90, a relatively high level of fear that could mean a short-term bottom is near. The market needs another day or two down to become short-term oversold, however. One negative is that the most recent Investors Intelligence survey of investment advisors, taken the middle of last week, found them bullish by a 2-to-1 margin. That's a dangerous level of complacency; bulls and bears were even at the April 4 low. We'll see what this week's survey brings, but that level of bullish sentiment could take some time to work off.
The economic fundamentals remain troubling, but not for the headline reasons. Two reports released last week bear closer scrutiny. On Friday, the unemployment report contained two interesting asides. First, for the first time in more than four decades, the service sector did not add jobs during the second quarter, a sign that economic weakness could be spreading to the broader economy from technology and manufacturing. And second, the aggregate hours index, a good predictor of GDP, fell 1.4% in the second quarter, a sign that second quarter GDP could show a decline when it is reported later this month. Two quarters of negative GDP is the classic definition of a recession.
And personal income and spending, released earlier in the week, showed that spending continues to outpace income, and the savings rate matched an all-time low at -1.3%. That means that the consumer may not continue to hold the economy up for much longer. The one wild card is how much remains of the wealth created during the roaring 1990s. But with net worth falling at by far the steepest rate recorded since the statistic was first tracked in 1946, further stock market declines could be a negative there too.