Equity Clock

Stock Market Outlook for September 7, 2010

Upcoming Events for Today:

1. No economic reports are due to be released

The Markets

Oversold, Overbought, Oversold, Overbought – where does the market stand now?   Friday saw North American markets rally for the fourth day in a row, leading to one of the best September starts in years.   The employment report released Friday indicated that the market shed an additional 54,000 jobs, sparking an increase in the unemployment rate from 9.5% to 9.6%.   However, this was better than the loss of 120,000 expected as the private sector added 67,000 jobs in the previous month.   Market participants instantly perceived this to mark a bottom in what has certainly been a tumultuous summer for stocks.   The 4-day rally amongst key indices has instantly erased oversold indications that had been overhanging the market for a couple of weeks.   We are now well into overbought territory.   Where we once were looking for an oversold bounce to correct the pessimistic imbalance, a pullback to correct the current overbought imbalance is now on the radar screen of many analysts.  

With economic news light this week as investors return to their desks from their summer hiatus, we should finally start to see regular, unimpeded trading activity as volumes regenerate and bets/allocations are made for the coming fall season.   Unfortunately, seasonal tendencies show the continuation of a weakening trend following the burst of optimism initiated prior to the Labor Day long-weekend.   Will history repeat?

The overwhelming consensus from analysts is that the bottom for the year is in, and it is true that the markets are a precursor to the strengthening economic trend.  However, with the economy continuously revealing these subtle hints of further weakening, such as with the ISM services figure on Friday, it’s no wonder that investors remain cautious and perhaps even restrain from trading activities until further clarity is achieved.  One such point of unrest falls on mid-term election events, for which the market commonly forms a conclusion of the outcome by the beginning of October.   The point is, don’t let your guard down as the month of September has a tendency to move against a lot of traders.

Technicals at present remain overbought, as mentioned previously, however, momentum shows no signs of fading as of yet.   Therefore, in absence of any significant economic news for much of this week, as well as a shortened one to boot, a continuation of this uphill climb continues to be the expectation with a diligent observance of any bearish crossover indication as it pertains to stochastics to confirm a signal to sell.     

The put/call ratio at closing bell on Friday was 0.97.   This was the second consecutive increase of this ratio over as many days as put trading is once again the order of the day.   The VIX has come down significantly, indicating that hedging by use of puts is a cheap and attractive option at this juncture.   To put the drop of the VIX into further perspective, the VIX Short-term futures ETN is now approaching the same levels that it held at the April highs.   Is this optimism or complacency?   The 10-day moving average of the put/call ratio has leveled off from its recent decline initiated following the August 20th peak.   A bottoming out of this 10-day average would be a bearish signal to the market, according to the contrarian view of this ratio.

Sectors that Moved the Market

Financial stocks showed the greatest gains on the day led by financial juggernaut Goldman Sachs.   When Goldman Sachs moves so to does the market.   Technical indicators are pointing to a possible entry point for this equity that is more than 20% off of its highs for this year after the SEC brought charges against this financial bellwether.  

Gains were plentiful across the sectors with riskier plays outpacing defensive sectors by a wide margin.   This does not necessarily mean that the play in defensive sectors is up.   Seasonal tendencies persist into October.   Presently health care is the only sector that is not listed as overbought according to technical indicators.

S&P 500 Index

Chart Courtesy of StockCharts.com

Total Returns

Yesterday: 1.32%  –  Trailing 5 days: 3.75%  –  Trailing 30 days: –2.02%

Averages for current day based on past 20 years of data

• Current Day: –0.25% with 45.45% of sessions gaining
• Next 7 days: 0.44% with 60.25% of sessions gaining (Max return: 1.15% by September 9 on Average)
• Next 30 days: –0.98% with 51.10% of sessions gaining (Max return: 2.52% by September 19 on Average)

TSE Composite

Chart Courtesy of StockCharts.com

Total Returns

Yesterday: 0.28%  –  Trailing 5 days: 2.23%  –  Trailing 30 days: 2.53%

Averages for current day based on past 10 years of data

• Current Day: –0.49% with 33.33% of sessions gaining
• Next 7 days: –0.55% with 47.50% of sessions gaining (Max return: 0.56% by September 9 on Average)
• Next 30 days: –3.42% with 46.81% of sessions gaining (Max return: 1.84% by September 20 on Average)