As we enter the last trimester of the year it looks to me like the stock markets might be setting up for a fall rally. The main reason is that many markets have spent a lot of time consolidating in 2014. It’s more likely those consolidations lead to a resumption of the trend higher before they put in a major top.
Biotech is one of these markets for instance. I think healthcare and biotech stocks might be setup for big gains going into the fall and winter. The IBB ETF has completed a large cup and handle consolidation pattern in 2014 and looks set to explode higher if a fall rally kicks off.
Semiconductors are also another place that could experience market leading gains if we get a fall rally. Semiconductors are only in year 2 of their bull market and have been leading the S&P 500 higher this year.
Some might say if the stock market is going to continue higher that means commodities should continue lower. I think that relationship is about to change potentially. The reason is that commodities are late in their bear market, which is approaching 3 years in duration and prices are hitting levels where they are just above the cost of production in many commodities.
You have to be careful when studying markets of assuming relationships between asset classes will always remain intact. It turns out that those relationships cycle between positive and negative correlations just like bull and bear markets cycle. So I think it is likely the negative correlation between stocks and commodities is about to switch back to a positive correlation.
The thing is you can enter a trade in commodities down here at a perfect risk reward point. The GCC ETF has fallen back to test the Stage 1 base breakout earlier in the year. If support fails then a Stage 4 is back in place and with minimal risk you can exit a long trade. If the base holds which I think might happen then with little downside risk you can get long GCC and be in early for a new bull trend in commodities.
Portions of the market bounced back strongly last week, led by technology. Bonds also had a strong week. Commodities continued to struggle, with gold and silver continuing to trend sideways to lower. I did a short article on corn earlier in the week and thought it looked like an interesting trade to the long side. The grains are still technically in a Stage 4 downtrend though.
Commodities are definitely in a do or die situation now as if they continue much lower from here the entire complex will be back in a Stage 4. If that transition occurs maybe the broad markets will continue to head higher. Semiconductors still look strong so they might be a good sector to look at for market leadership. Biotech is also looking like it wants to resume a Stage 2 uptrend. Many biotech stocks transitioned back into Stage 1 or 2 last week. Checkout the chart of IBB below and notice it has formed a potential cup and handle continuation pattern higher. It is also once again outperforming the S&P 500.
U.S. stock markets continued to deteriorate last week as many individual sectors weakened. Developed foreign markets are showing a lot of weakness, according to my latest Stage Analysis report over 50% of foreign markets are in Stage 3 now. Emerging markets comparatively still have over 80% in Stage 2. And the developed markets that are still in Stage 2 include commodity related countries like Australia and Canada. So the market appears to continue to be transitioning to undervalued areas including commodities and emerging markets. This is something that the financial media fails to report on, but is what is actually happening under the surface.
One relationship that continues to fascinate is silver stocks vs. silver and gold stocks vs. gold. Even though gold and silver have both pulled back over the last month the gold and silver stocks have held up extremely well. Are they forecasting higher gold and silver prices for the fall? They could be but they also will not continue to go higher if the metals don’t eventually go higher. So I would interpret their action as cautiously bullish for the metals. Here’s the charts of silver stocks vs. silver and gold stocks vs. gold and you can see how both are at or close to 52-week highs.
Commodities in general still look mixed though, grains and energy look weak while precious metals and base metals are trying to remain in uptrends. Coffee and meat also are looking mixed as they retest their uptrend. Weakness overall in commodities might not bode well for precious metals.
Lots of broad based deterioration in the U.S. stock market this week. Homebuilders and banks got hit particularly last week along with some industrial stocks. There aren’t too many stocks making new highs either. It’s going to take more than a new fast food chain (LOCO) to push this market higher.
Commodities still aren’t acting well either and I’m paying close attention to how the chart of the continuous commodities index plays out. The grains have crashed again which has pushed commodities lower. Oil and natural gas have also pulled back. Coffee actually had a nice rally again though which I actually covered in a previous article, as it found support at the 30-week moving average.
I’m separating the Stage Analysis Report from a separate weekend report for this week and may do that going forward. This week I’d like to select some charts from different areas and provide some brief comments on them.
First off one of the shocking events of the week was Amazon’s earnings report. Amazon got punished severely on Friday after forecasting a big loss for its next earnings report. Amazon gapped back below its 200 day moving average on super heavy volume. Right now there’s some fragmented leadership in technology stocks with Facebook and Apple making new highs but there are also plenty of stocks like Amazon acting erratic like they are not going higher anytime soon.
Gold has continued it’s correction off of the $1340 level but had a big up day Friday. Technically the gold stocks look awesome in my opinion as long as they hold the 200 day moving average. Now the 50 day moving average is climbing above the 200, and volume continues to be impressive when gold stocks rally. Notice that the March rally failed at the 200 day moving average. This time GDXJ has been holding that level for a month while gold stocks work off their overbought condition. I think this is super-bullish and the leading gold stocks are acting extremely well too. There are still a lot of skeptics and scaredy-cats in the gold sector too which is music to a bull’s ears.
Twitter is an example of how weak the bounce has been since May in some of the former leading stocks. This is a fragmented market unlike 2013 where everything went up strongly. I personally think Twitter is going to go to the single digits, might be a good short candidate in a bear market.
The Russell 2000 has been acting weak all year. This isn’t a definitive bear signal, but something to pay attention too. Just looking at the daily volume you can see a ton of high volume selling days. Plus a head and shoulders pattern is potentially in play here. The 108 level is one to watch if we get a break lower from there IWM would be in a potential head and shoulders breakdown.