The stock market is getting weaker, not stronger. Over the past few months we have been letting our readers know about all the bearish signals that were emerging on our radar. Notwithstanding more easy money from the Fed/other central banks, the market appears to be forming a major top. Leadership has narrowed substantially over the past few months, fewer and fewer stocks are acting well, more areas continue to fall by the wayside, only seven (23%) stocks in the Dow are acting well, and 23 (77%) are in poor technical shape. Apple Inc ($AAPL), the most over-owned institutional stock, is breaking down (sliced below major support last week), and demand is waning across the globe. Transportation stocks and major global commodities - both very dependent on demand - a.k.a. economic activity - are getting disseminated.
That directly contradicts the Fed's narrative that the economy is improving and they must raise rates later this year. So far, even with rates at zero, economic activity, measured by GDP, continues to miss estimates, and deflation remains more of a threat than inflation (the Fed's dual mandate). So why would the Fed want to raise rates when neither one of its mandates are being met?
From where we sit, the Fed is not going to raise rates until the "data" forces their hand. The next level to watch is 2039 in the S&P 500. If that level is taken out, we have to expect lower prices will follow. Longer term, it is important to note that we are still in a bull market. It's an aging bull, but a bull nonetheless. It is also healthy to see even with all the bearish signals - the major indices are only a few percentage points below their record highs - so a few strong up weeks will change the playing field. Until that happens, the market is getting weaker, not stronger, and the major indices appear to be forming a major topping pattern.
Monday-Wednesday's Action: Apple Breaks Support
Stocks fell on Monday after Greece's stock market plunged 20% after being closed for five weeks. Apple sliced below support of its year-long base and broke below its 200 DMA line, which also weighed on stocks. China's Shanghai Composite fell another -1.1% after the latest round of economic data was released. China's official Manufacturing PMI plunged to a five-month low (50.0; expected 50.2), while the Non-Manufacturing PMI beat estimates and rose to 53.9 from 53.8, representing a five-month high. Remember, China is an export driven economy, and the fact that their manufacturing is falling bodes poorly for the global economy. A slew of commodities continued to plunge on Monday after the softer than expected economic data was released from China. In the US, personal income rose 0.4%, beating estimates for 0.3%. Motor Vehicle Sales rose to 14.2M, beating estimates for 13.6M. Gallup US Consumer spending measures rose to $91, beating estimates for $90. The ISM manufacturing index contracted to 52.7, missing estimates for 53.7. The PMI manufacturing index matched estimates to 53.8. Construction spending unexpectedly slid to 0.1%, missing estimates for 0.6%.
Stocks were quiet on Tuesday after China announced more measures to curb short selling in their stock market. In the US, factory orders rose by 1.8%, barely beating estimates for 1.7%. Regeneron Pharmaceuticals ($REGN) gapped higher after reporting earnings. The firm raised its US sales growth forecast for its macular degeneration drug Eyelea. Stocks opened higher on Wednesday as investors digested the latest round of economic and earnings data. Before the open, ADP, the country's largest private payrolls company, said US employers added 185k new private jobs last month, missing estimates for 210k. The PMI service index rose to 55.7, beating estimates for 55.2. The ISM non-mfg index jumped nicely to 60.3, easily beating estimates for 56.2. In earnings news, shares of Walt Disney Co ($DIS) gapped down after the company reported a strong quarter, but investors were not happy with ESPN. First Solar ($FSLR) and Activision Blizzard Corp ($ATVI) gapped up after releasing their latest results.
Thursday-Friday’s Action: Market Gets Smacked
Stocks fell hard on Thursday after a slew of big media stocks gapped down, as it became abundandly clear that more and more people are cutting the cord. Viacom ($VIAB) tanked -14.2% after reporting in-line results on light revenue. Other media stocks were also clobbered on the news. 21st Century Fox ($FOX) slid over six percent, even though the company beat on the bottom line. Disney plunged over 10% last week after reporting earnings and citing fewer subscribers for their paid ESPN service. Tesla ($$TSLA) gapped down after the company lowered guidance and lowered the number of cars expected to be delivered later this year. Weekly initial claims rose to 270k, missing estimates for 271k. Stocks fell on Friday after the government said US employers added 215k new jobs in July, missing Reuters estimate for 223k. The unemployment rate came in at 5.3%, and average hourly earnings rose +0.2%, matching estimates. The report supported the consensus that the Fed may raise rates in September, which was considered a primary reason why stocks fell on Friday.
Market Outlook: A Major Top?
Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrated its sixth anniversary in March 2015) and the last two major bull markets ended shortly after their fifth anniversary; 1994-2000 and 2002-Oct 2007). To be clear, the central bank put is the primary driver of this entire 6.5 year bull market and when that ends, we want you to be ready. Until then, the market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam's commentary/thoughts on the market. Consider joining SarhanCapital.com.
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