An Inside Week

It was a great week for the bulls as the markets rocketed up better than 4.5% on the major indexes. With all that great action, caution remains as the markets traded inside the farthest levels of the prior week. In technical terms it was an inside week, where neither the highs nor the lows of the prior week were penetrated. Which really means it was a waste of four clean shirts and gas as not much can be gleaned from the action. Even the volume extrapolated for the holiday, indicates less volume this week than last. So while constructive, unless there is a positive follow through next week, the action may be one of healing an oversold condition.

Prior to this week’s run, markets were stretched significantly below their respective 21 day moving averages. Those averages have now been retaken on the S&P and Dow Industrials. This has alleviated much of the oversold condition. The AAII poll showed bearishness at extreme levels as 57% of respondents fell into that camp. This echelon of negativity has not been witnessed since the March 2009 low. It must be noted though that sentiment is a secondary indicator and not necessarily a very good timing mechanism. Sentiment of any kind can change rather quickly.

Next week earnings season gets started with Alcoa (AA) announcing on Monday, Intel (INTC) on Tuesday, and many banks later in the week. Overall earnings for the S&P 500 companies are expected to rise 34% year over year. In all likelihood investors will be especially vigilant for the forward earnings forecasts as concerns about a second half slowdown are elevated. Initially markets may get whipsawed (what else is new) as each company announces. Once a trend for either better or worse than expected earnings or outlooks is established, the markets will settle into an appropriate trend as well – up or down depending on the results.

The facts remain, that the uptrend from last year has been broken and a new downtrend is now in place. There are a series of lower highs and lower lows for prices – which is a bearish trend. The current primary (multi-year) trend is down. The intermediate trend (multi month) is down but the short term (this week) trend is up. There is a significant amount of overhead resistance just above current levels which could also ignite some near term selling. I recommend a hedged position with exposure to both longs and shorts, with a good deal of cash on the sidelines ready to be allocated when the next move becomes clearer.

The markets are not out of the woods yet as some pundits would have you believe. This week did not reverse the market’s direction, but it did set up the potential for a positive follow through next week. Volume was light and no significant resistance points were reversed. Time will be the determining factor.