Previously …

“ In conclusion, I am expecting the market to hold above the 1000 level and establish an upward momentum in the coming weeks. The bulls should still be in firm control of the market. The bears will be gaining strength as the market meets a few more critical resistance levels over these next few weeks.”

The market had established a stronghold above the major psychological levels last week. The Nasdaq Composite is the only major index that did not manage to hold above its major support level (2000). The clashing of the bulls and the bears intensified last week. Once again the bears had made their strong presence felt throughout the week. However, the bulls fought back strongly at the closing bell of the trading day especially on bearish days, not allowing the market to complete any successful pullback.

On Monday, the market traded flat as the bullish and bearish camps started to establish their respective levels. It was a quiet market as there was no major economic news or earnings scheduled for release on Monday.

On Tuesday, The market was profit taking ahead of the announcement of the FOMC statement on Wednesday. The market participants feared that the Fed might start tightening the monetary policy in the near future as the Chinese government had been doing in the recent report. The economic data also provided the bears much needed strength as Labor costs fell by the most in eight years.

On Wednesday, the market rallied heavily in the opening trading period to offset the previous session’s loss due to the fear of pre FOMC statement. This time round the bulls got their support from the stronger than expected Trade Balance report. The market took a dive after the Fed announced that the Fed Fund Rate remained unchanged at its all time low of 0 to 0.25%. The FOMC statement did not surprise the market, as it will still be continuing with its QE policy. However, the FOMC statement did hint that they would slow its purchases of long term Treasuries and kill off the fruitless program at the end of October.

On Thursday, the unexpected positive GDP reports from the 2 European powerhouses, France and Germany, helped send the US market into positives at the opening bell. The market open strongly even though the retail sales figures came out bad and the unemployment claims continued to surge higher in the recent weeks. Retail sales fell 0.1% in July as soft sales for most types of merchandise offset a boost from the government’s cash-for-clunkers subsidy, the Commerce Department reported. The retail sales would have fallen 0.6% without the boost from the government’s cash-for-clunkers subsidy program. The report shows that consumer spending is still weak despite attempts by the government to stimulate demand.

Retail sales figures are likely to stay weak as consumers’ budgets remain tight and were more selective in their discretionary spending in the 2nd quarter than from earlier this year.

Wal-Mart Chief Financial Officer Tom Schoewe said in a media conference call that shoppers are buying closer to need and are focusing more on basics, reflected in this back-to-school season. He said the similar trends would likely occur this holiday season with customers continuing to look for “value”.

On Friday, the market experienced a wash out in the opening trading period with the bears charging in all directions. The worst than expected consumer sentiment reading of 63.2 vs 69.1 sent the market further down after half an hour into the session. In the consumer sentiment report, it noted that the consumer has slowly cut their spending and also indicated that they will tighten their purses in the near future.

Major Event

• FDIC had closed 4 banks on Friday. Colonial BancGroup Inc. has become the largest bank failure this year with deposits of around $20 billion at the end of June.
• 78 banks have failed this year as a lingering recession and surging unemployment leaves the industry nursing heavy loan losses.
• The Shanghai Composite Index dropped 5.8% to 2830 on Monday 17/08/09. This also mark the 3rd heavy fall in the last 5 days with an average of more than 4%.
• Home Depot and Lowe’s still faces uncertainty in the near future.
• Foreclosure rates in California had picked up in the 1st quarter after slowing in the fourth quarter last year.

Economic Data

In the coming week, the market will be focusing on housing and manufacturing data. The market will be looking at the NAHB Housing Market index on Monday followed by the Building Permits, Housing Starts and Existing Home Sales on Tuesday and Friday respectively. Besides manufacturing data featuring on Monday and Thursday, the market will be looking at the TIC Long-Term Purchases and Producer Price Index on Monday and Tuesday respectively.

Earnings

A handful of companies will be announcing their earnings this coming week as 90% of the S&P500 companies have already reported results for the 2nd quarter. Notable Companies such as Lowe’s Cos., Target Corp, Saks Inc, Barnes & Noble Inc. and Sears Holding Corp. are slated to report earnings in the coming week.

Summary

The aggressively downfall in the Chinese market in the past few days will weigh on markets around the world. Commodity companies are likely to be the major sectors that will get burnt by fears from the Chinese market. The lousy retail sales report and the collapse of the banking industry should further strike fear into the market in the coming week.

The market will be looking for any sign of stabilization in the housing sector in the coming week. They are hoping to find some positive news for reasons to hang onto their gains from recent months.

The crude oil prices are likely to be pressured from the sell off of commodity stocks in the Chinese market. The risk aversion trade might kick in as markets around the world start profit taking. This would in turn send the Dollar and Yen to higher ground against other currencies.

The market sentiment is still quite resilient as the market did not give up the important levels easily especially at the closing bell.

In conclusion, I am expecting the market to take a beating in this coming week. The S&P500 will likely to test the 980 level. The only lifeline in the market will be having a good report from the housing data in the coming week. Watch out for the bear as the Chinese market had kick start the red army.

Sector Rotation

Consumer Staples (0.41%) led the charge last week followed by Health Care (0.29%), Utilities (0.21%) and Technology (0.05%). Amongst the laggards were Materials (-0.07%), Financials (-0.35%), Industrials (-0.60%), Energy (-0.67%) and Consumer Discretionary (-1.45%).

The market turned cautious last week as it was clearly showing in the leading charts. The top 3 sectors last week were all defensive sectors. As the market took profit from recent gains, the cautious investors moved to park their money into these defensive sectors.

In Summary, the defensive sectors are likely to pick up the pace in the coming weeks as more investors are likely to park their money there. Commodity sectors are most likely to take the worst beating this week as the Chinese government has slowed down its purchases in recent weeks.

Technical Analysis

The S&P500 Index closed at 1004 last week. This indicates a loss of 6 points (-0.6%) from the previous week’s close. This week loss marked the 5th candle reversal in the weekly candles.

Previously …

“ Looking at weekly candles, the S&P500 Index is suggesting a pause to the upside in the coming week. This is because the S&P500 Index is at its 4th consecutive week of positive gains and is likely to be a doji candle for a 5th candle reversal pattern. If that is the worst that can happen, then the best we can get is more healthy upsides.”

Last week the market traded pretty sideways to the downside. The market traded sideways in the range of 992 to 1010 for the week. The market should have traded even lower than the 1000 level if not for the “Stick Save” that happened throughout the week. The “Stick Save” refers to the sudden spike in the last 15 to 30 minutes in the closing bell.

The market started badly in the first two days of the week due to profit taking ahead of the FOMC announcement on Wednesday. The Fed maintained the Fed Fund Rate’s record low interest rate of 0.25% on Wednesday. The market rallied as the Fed did not come out with any surprising news. However the Fed did hint that they would be in the process of slowing down the purchase of long term Treasuries and shut off the program by this coming October. The market continued to rally till Thursday because of the better than expected GDP report from the European giants, France and Germany.

On Friday, the market fell off quickly as it threatened to wipe off the gains from Wednesday and Thursday when the worst than expected Consumer Sentiment report was revealed. The market proved to be resilient as the “Stick Save” appeared in the last 30 minutes to send the S&P500 up to close above the 1000 level.

Looking at weekly candles, the S&P500 Index is suggesting a pause to the downside in the coming week. This is because the weekly candle indicates a Doji pattern. However looking at the Doji, the bulls had more of an upper hand than the bears. The bears will be making waves if the S&P500 can convincingly break below the 990 level in the coming week.

Looking at daily candles, the S&P500 Index looks like it might be testing the low of 992 on Monday. The daily candle did not show any clear sign of direction but the market seems to be testing the lows rather than the highs.

The immediate support levels are S1: 1000, S2: 990 and S3: 980.
The immediate resistance levels are R1: 1025, R2: 1050 and R3: 1100.

The Dollar Index (DXY) closed at 79 for the week again. The dollar will likely to gain strength as the markets go into the risk aversion trade.

In conclusion, the market this coming week should be going down and trading between the range of 1000 and 980. The market will be expected to trade lower if the housing data does not meet expectations. Further sell off from the Chinese market are likely to spill over into the western markets and the rest of the world.

As of the time of this report, Monday is expected to make a major sell-off to start the week on a negative note. S&P Futures have been reading -1.75% to -2.15% all afternoon and now during the pre-market. Asian markets closed averagely -3.25% to the downside and European markets are trading -2.50% down.

[Conrad Alvin Lim]