Instead of reassuring investors, the 0.75% increase expected by the FOMC last week made them sell more stocks. The so-called dot plot has spooked the market, with rates expected to reach 4.25-4.50% by the end of the year and a rise in 2023. It ended any remaining hope that the FOMC would hold off on raising rates and thereby increase recession fears.
These fears were not helped by Thursday’s Conference Board’s leading economic index. Their senior director of economics, Ataman Ozildirim, commented that “the US LEI may indicate a six-month consecutive decline.” For a full discussion of how LEI readings often predict past recessions, I suggest reading the excellent research in Advisory Views.
But stocks weren’t the only heavy losers, with crude oil futures down 7.1 percent for the week. Many traders have concluded that the possibility of an economic recession will reduce the demand for crude oil around the world.
The unbroken crude oil contract peaked at $130.50 in March and then rebounded above $123 in June. Crude oil has closed below the 20-week EMA every week since early July. This resistance now stands at $92.14. The next strong support, line A, is around $66.49, which corresponds to the weekly star-band. A decline to this level will certainly reduce the risk of inflation in the coming months.
On-Balance Volume (OBV) has fallen below the WMA and support, line B, for the week of July 15Th It is still decreasing and negative. Since the early 1980s, I have relied on the Herrick Paioff Index (HPI) as a key indicator to determine the direction of commodity prices. The HPI is simply an accounting method that measures the inflows or outflows of money by calculating the daily difference in dollar rates. This is done using volume, open demand and price data.
By mid-July, the HPI, line d, had fallen below the zero line, reversing the positive sign since the beginning of the year. The HPI WMA is below zero which is consistent with further declines. Although lower crude could lead to more selling in popular oil stocks, it should put some pressure on other stocks, such as airlines.
Energy Sector Choice (XLE
Weekly technical indicators turned negative last week. The relative performance (RS) has dropped below the WMA indicating that the XLE is not leading the S&P 500. The OBV is also below the WMA and falling below the support on line c indicates further selling.
None of our tracked markets were as weak as crude oil or the XLE last week. The iShares Russell 2000 fell 6.5% and the Dow Jones Transportation Average fell 5.4%. The benchmark S&P 500 fell 4.7%, much weaker than the Nasdaq 100 ($NDX), which was leading the market lower. $NDX is down 30.7% year-to-date (YTD).
The Dow Jones Industrial Average was down 3.4%, while the Dow Jones Industrial Average lost 4% for the week. Even gold was weaker, down 1.8% and one of the four markets I suggested you watch in August.
The weekly market internals were some of the most negative I’ve ever seen on the NYSE with 392 advancing issues and 3088 declining from 3564 today. So 89% of the NYSE Composite was low for the week.
The Spyder Trust (SPY
) was last week’s low of $363.29 as the June low of $362.17 was not broken. The weekly star band was breached last week and is at $357.43 for next week. Flag formations, lines A and B, measure lower targets around $340. That’s 7.6% below Friday’s close.
Last week’s shift in the S&P 500 Advance/Decline line caused problems for the market as all weekly and daily A/D lines turned negative. The only advance/decline lines I follow are the S&P 500 A/D line still below the June low, line C. Many A/D swings are oversold on a short term basis.
Apart from oversold readings and high levels of depression for many indicators, there are few positives to suggest that we are at important lows as seen in June-July. According to Bloomberg, 33 million deals were purchased during Friday’s action, the most ever. The increase in production has helped boost sales, but production has been stretched too far and is likely to pull back this week.
Many advisors and money managers chose energy stocks this year because of their valuations and high yields. This makes these stocks more vulnerable in a sell-all market, as we saw last week. A sharp selloff in energy stocks could further weaken the already battered market.