8/2/09

 

The 13-day cycle correction lasted only 2 days, and the SPX (http://www.geocities.com/petegersb/SP500.GIF ) resumed its rally to move almost to the 1000. The 26-day cycle is now 15 days old and overbought, but the young 13-day and 10-wk cycles may sustain the rally this week despite a downturn in the short-term composite.  Overhead resistance probably looms at 1000 and at the 38.2% Fibonacci retracement of the bear market at 1014. Short-term support comes in at the June high of 956, and that level should be reinforced by the rising 10-wk moving average which currently stands at 910, but will rise during the time it takes for the 10-wk cycle to finish its rally and complete a correction – probably sometime in September. Stocks will have the support of a favorable 20-wk cycle during that period, so corrections should continue to be shallow.  Other indexes show the same patterns (NASDAQ Composite (http://www.geocities.com/petegersb/NasdaqComposite.GIF ), NDX (http://www.geocities.com/petegersb/NDX.GIF ), NYSE Composite (http://www.geocities.com/petegersb/NYSE.GIF), Russell 2000 index (http://www.geocities.com/petegersb/Russell2000.GIF ). For my longer-term assessment, see last week’s report.

 

Sentiment

 

Advisory services (http://www.geocities.com/petegersb/InvestorsIntelligence.GIF ) and individual investors (http://www.geocities.com/petegersb/AAIIsentiment.GIF ) became more enthusiastic about this rally in the latest surveys – enough so to turn the five-week moving average on the combined survey data upward (http://www.geocities.com/petegersb/SurveysCombined.GIF ). There is plenty of room for more enthusiasm before the 20-wk and 9-mo cycle peak.

 

Fundamentals

 

The first cut at second-quarter GDP came in better than expected, lending more credence to other indications that the various economic rescue and stimulus programs are working. If so, perhaps next year’s earnings will also come in better than forecast, and justify the high prices being paid for the average stock.

 

Treasury bonds: Prices held above the June low as expected as the 10-week and shorter cycles bottomed. Despite the better-than-expected GDP report, T-Bonds (http://www.geocities.com/petegersb/Treasury-20yr.GIF ) then had a strong rally last week. They are now challenging the down trending 10-wk moving average, and likely will move higher to challenge the flat 9-mo moving average before this 7-week-old intermediate rally produces a 20-wk and 9-mo cycle peak.  Bond Sentiment (http://www.geocities.com/petegersb/BondSentiment.GIF ), which was already quite negative, shifted to even greater pessimism in the latest survey. That’s unusual in the face of a 7 week old rally, but the disbelief in this intermediate rally suggests it will continue.

 

Inflation Protected Treasuries (http://www.geocities.com/petegersb/TIPs.GIF) under-performed conventional treasuries last week, but they rose to break the downtrend line from early 2008 anyway. The cycles are poorly defined, but most suggest a further rally of as much as 5% before encountering resistance at the 2008 summertime lows. The dip in inflation expectations (http://www.geocities.com/petegersb/CPI.GIF ) seems somewhat incongruous in light of the better-than-expected GDP numbers, but it does help explain the bond rally. Maybe bond investors know something stock investors don’t or vice-versa.

 

Corporate bonds (http://www.geocities.com/petegersb/CorporateBonds.GIF ) accelerated the pace of the rally that has continued essentially uninterrupted since early March, and has now produced new 12 month highs at a level that provided support throughout the second half of 2007 and early 2008. Given the overbought condition of the 13-day, 26-day and 20-wk cycles, it appears likely to provide resistance this time.

 

Municipal bond’s (http://www.geocities.com/petegersb/MunicipalBonds.GIF ) extended their intermediate uptrend last week but the short-term composite suggests a likely 10-wk cycle peak on Friday. If so it would be only the first 10-week cycle peak in a continuing 20-wk cycle uptrend. The flat 10-wk and 9-mo moving averages provide likely support just a little lower on any pullback.

 

Crude oil (http://www.geocities.com/petegersb/CrudeOil.GIF ) corrected its overbought 13-day cycle with a 2-day pullback, and rallied strongly in the next two days to recoup the loss and then some. The rally appears likely to continue this week. If it does, the intermediate composite will turn up to indicate a resumption of the intermediate uptrend.  

 

Natural gas (http://www.geocities.com/petegersb/NaturalGas.GIF ) also dipped, held above the July low, and then rebounded to the 10-wk moving average, which coincides with the year-old downtrend line. The favorable 13-day and 10-wk cycles suggest those resistance levels will be penetrated this week, but the overbought and aging 26-day cycle must extend farther right if the attempt is to succeed. The middle-aged and down trending 20-wk cycle argues against an upside breakout. A continuation of the 6 month old trading range appears more likely.

 

Energy stocks (http://www.geocities.com/petegersb/EnergySPDR.GIF) were the worst performing sector last week, although they held marginally above the flat 10-wk moving average. The favorable 10-wk cycle doesn’t appear up to the task of overcoming problems in the other cycles. A continuation of the 10-month-old trading range appears likely.  

 

Gold (http://www.geocities.com/petegersb/GoldBullion.GIF) dipped early and rallied late in the week like most commodities, recovering most of its losses by week’s end. The fresh 13-day cycle rally and favorable 10-wk cycle should extend the rally this week. When this 10-wk cycle corrects, it should produce a 20-wk and 9-mo cycle low. If the correction is shallow, gold should move to new highs this autumn.

 

Gold Stocks (http://www.geocities.com/petegersb/GoldStocks.GIF ) cycles are similarly positioned with favorable 13-day and 10-week cycles and other cycles declining. The completion of the current 10-wk cycle will likely afford a good buying opportunity.

 

The Dollar (http://www.geocities.com/petegersb/Dollar.GIF) held the June low, and then rallied back up to the 10-wk moving average where it stalled on Friday. The short-term rally appears likely to extend into this week, but after it ends new annual lows appear likely.