In The Week Ahead: Market Returns Hinge On Greece And China

The major U.S. stock indices finished last week essentially unchanged on the heels of two consecutive weeks of declines. My work suggests the stock market is within weeks of a significant bottom. 

But the question is whether that bottom occurs now or if there is one more shoe to drop first.

This week, that “shoe” is Greece and China, more specifically, whether a bailout deal for Greece can be finalized and whether the Chinese government can stem the tsunami in that country’s stock market, which saw the Shanghai Composite collapse by 35% over the past month. These issues will have a big influence on whether the U.S. market begins its next leg higher now or later.

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The two strongest sectors of the S&P 500 last week were defensive consumer staples and utilities, and the two weakest were economically sensitive materials and energy. This collectively suggests a cautious investor heading into this week, which is undoubtedly due to the turmoil and uncertainty overseas.

US, Global Stock Markets At Major Decision Point
In last week’s Market Outlook, I pointed out that the bellwether S&P 500 was testing major underlying support at its 200-day moving average, a widely watched major trend proxy. 

The broader market index continues to hover just above this support. It has been accompanied by coincident tests of similarly important support levels in other key stock market indices in the United States and globally, most notably the German DAX, Paris CAC 40 and Shanghai Composite. The resolution of these global inflection points is directly tied to the ongoing issues in Greece and China.

This week’s first chart looks at another U.S. index that is testing major support, the tech-heavy and market-leading Nasdaq 100. I first pointed out a bullish chart pattern in April that targeted a rise to 4,600, and most recently discussed this situation in the May 11 report.

Nasdaq 100

Last week, the Nasdaq 100 tested, held and rebounded from 4,347, which is the upper boundary of a three-month period of investor indecision that it broke higher from back in February. 

As long as this support, in combination with the 200-day moving average just below it at 4,299, continues to hold, my 4,600 upside target remains valid. However, a sustained breakdown below this area would negate the target and suggest that an important peak is in place at the index’s recent highs.

The next chart plots the Hong Kong Hang Seng Index weekly since 2008. The Chinese index tested, held and rebounded from its October 2008 secular uptrend line last week. 

As far as I’m concerned, this chart is proof that governments also understand the importance of trends and investor psychology pertaining to financial asset prices. It was just as this seven-year support level at 23,180 was being tested late last week that the Chinese government threw the kitchen sink at the market, via aggressive regulatory intervention, to hold that level and trigger a strong rebound into Friday’s close.

Hang Seng

This trendline is not only a critical inflection point for the Chinese stock market, but it is also a global concern as a collapse below 23,180 would indirectly signal a major bearish trend change in the second largest global economy.  

Moreover, the Hang Seng and S&P 500 have maintained a relatively stable positive statistical correlation for the past 30 years. So, as goes the Chinese market, so is likely to go our markets here in the States.

Housing Remains A Bright Spot
Since the end of last year, and most recently in the April 6 Market Outlook, I have been talking about the late November breakout higher in the PHLX Housing Sector Index (HGX) and its implications for an improving housing sector during 2015.

HGX has already risen by 9.5% year to date, compared to just 0.9% for the S&P 500, as it continues to move toward my $250 upside target, which is 6.2% above Friday’s close.

One way for Market Outlook readers to participate in continued strength in housing is via sector constituent Toll Brothers (NYSE: TOL). As the next chart shows, the stock recently resumed its December advance following about 10 weeks of sideways investor indecision.  

TOL Chart

The resumption of the larger trend targets an additional 8% rise to $42 that will remain valid as long as the middle of the indecision area at $36.84 holds as support.

Putting It All Together 
The single most important takeaway from this week’s report is that the U.S. stock market appears to be within weeks of a significant bottom. What’s not as clear is whether that bottom is already in place or if there will be one more near-term decline first. This will largely hinge on if and how the current crises in Greece and China are resolved over the next several weeks. 

The U.S. housing sector has handily outperformed the broader market thus far this year. Barring any upcoming systemic problems involving Greece and China, should continue to do so into the second half amid rising long-term U.S. interest rates as the market prepares for the beginning of a new tightening cycle by the Federal Reserve.

Market Outlook

This article was originally published on Has The Market Put In A Significant Bottom?‚Äč