August 17, 2016

August 17, 2016 Unwinding The Negatives The last two weeks of July managed to extend the run into record territory, despite oil falling from $45 to $40, but when oil broke $40, it ignited concerns and projections for sub-$30 oil. That fear was quickly reversed after the Saudis asked for an off-schedule meeting of OPEC to consider production freezes. That was quickly welcome news for crude, which has rebounded to $46.50, and to the Energy sector, the Vanguard Energy (VDE), which held its 200-day moving average, aiding in the bounce. Looking at the S & P 500, driven down by that break in oil, also recovered over the past week-and-a-half. However, we are seeing a divergence emerge from this pop to new highs. This is not an indication of a major signal, but more a warning of a possible pullback. This would be completely within the seasonal context of seeing weakness from mid-August through September. There a many reasons why we see such seasonal patterns that tend to drive markets to October lows. However, we would point out that the typical “fund selling” that occurs in September is often made worse when stocks are already headed lower. This is not the case this year. S&P 500z There is also no “top of consequence”. In fact, we would look at the significant areal of support below 2120 to 2050 as strong technical support for any pullback that might occur. Timing-wise, given that the market does not like uncertainty, there are two events that has the investors’ attentions, the US election and the FOMC meeting. Despite the strong lead that Hilary Clinton may enjoy at the moment, people are fickle. Don’t underestimate the fact that the tide of support could turn quickly on bad news for Clinton, and the world is fearful of what a Trump presidency might mean. I say this only in the context that he is “unproven”, and not as a political opinion. If Clinton wins, the market pretty much knows what to expect, whether they like it or not. No so with Trump. Perhaps more important will be the fate of the Senate. If the Senate goes Democratic, it is still unlikely that the House will turn. Therefore, big things like $15/hour minimum wage won’t pass, but the potential for a more liberal Supreme Court will have repercussions for decades. The other point we are making about the uncertainty in September is the FOMC meeting. The market gets nervous when it doesn’t know what to expect from the next meeting, and that should become more and more the case as time pushes forward. We believe the economy and the market can endure a rate increase, but it will have some negative undertones initially. Also coming up in the fall will be a shift in focus to Consumer Discretionary. The Vanguard Consumer Discretionary VCR sector has been driven by the likes of Amazon AMZN and Home Depot HD, as well as Comcast CMCSA and Time Warner TWX. Today’s earnings disappointment came from Lowe’s Cos. LOW, which is off nearly 6% today. LOW As Lowe’s approaches its 200-day moving average and falls into an area of technical support, it may become an interesting opportunity. It is early, and we would want to see a bounce and then a test, but it should be on the radar for a move back up over 78 to fill that gap from 80.81. While it didn’t match the results from Home Depot, the fact that significant storm damage in the south that has destroyed 40,000 homes will require significant “home repair”, it is a positive for HD and LOW. This is a sector to watch.
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