Technical Weakness in the Market

Trend ChartVolatility continued in the market in July as headlines at home and around the world provided investors with plenty of uncertainty.  The Greek drama continued as Greece formally defaulted on $1.7 billion in debt at the end of June.  Stocks in China peaked in June at the highest value in seven years, and then sold off sharply in July.  The Federal Reserve here at home continued to send out the message that they intend to start raising short term interest rates before the end of the year.   Top all this with earnings season, which is always a volatile period as corporations publish their 2nd Quarter revenue and profits.

In mid-July Greece received the help it asked for from fellow euro-zone leaders after agreeing to measures far more austere than were offered a month prior.

The sell-off in China trickled down to the U. S. stock market and the commodity sector. There is uncertainty about the Chinese economy and that government’s ability to stimulate growth.  China is a major purchaser of raw materials.  If manufacturing declines in China, then demand for raw materials is likely to decline resulting in lower prices for basic commodities.

A high interest continues in when, not if, the Federal Reserve will raise rates.  Is the market pricing this in now or will there be more damage ahead?  It remains to be seen.  It is obvious that the Board knows it has to begin raising rates which have hovered around zero for nearly seven years, but it is resisting making that first move.  The next Fed meeting is scheduled for mid-September.

In July the divergence between the indexes and individual stocks was the real story.  A few market leaders held up the indexes while the breadth was just not there.  When performance narrows to a handful of companies it is cause for concern.  We have a two-tier market where a few high growth companies are doing well and the majority of individual stocks are struggling.

The 50 day and the 200 day moving averages are commonly used in stock analysis to identify current trends and support and resistance levels.  In August, the 50 day moving average of the S&P 500 index leveled out and began a downtrend.  Twice in early July the S&P 500 closed slightly below its 200 day moving average, and subsequently ran back up.  In August the index dropped below the 200 day moving average intraday, then bounced and closed above it.  At this writing the 50 day and the 200 day are getting very close which can be a warning of lower prices to come.  Some investors see this as a buying opportunity and others see it as an indicator to sell before prices drop lower.

Will the strong stocks pull up the rest of the market, or is there a broad correction ahead and will the leaders follow the majority of stocks down?  Technically there is weakness which bears watching.  In uncertain times with the technical signals we are seeing now, holding more cash is a prudent strategy until time reveals the future trend of the market.

This report is a publication of Guelich Capital Management LLC, a registered investment advisor. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

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