For the fourth time since February, the bellwether S&P 500 tested and successfully rallied last week from its 200-day moving average -- a widely watched major trend proxy currently situated at 2,068 -- to lead yet another broader market rebound.
Last week's rally was again driven by the Pavlovian "buy the dip" mentality that investors have been conditioned with following years of quantitative easing by the Federal Reserve. While QE officially ended in October, as long as this strategy continues to work, investors are likely to keep doing it.
Meanwhile, the S&P 500 continues to ping-pong within a tight, 4%-to-5% trading range. Despite a lot of choppy trading and historically large daily trading ranges, the index closed July up only a meager 2.2% for the year.
All sectors of the S&P 500 ended in positive territory last week except for beleaguered energy, which lost 0.2%. Leading last week's rebound was defensive utilities, which gained 3.9%, while quietly becoming the best-performing sector of the past month.
Utilities are now on my radar screen as a potential sector to overweight this quarter. However, I want to see a little more price strength amid some positive asset flows before it becomes a buying opportunity. Stay tuned to Market Outlook for updates on this.
Finally, I wanted to mention that it is easy for investors (and analysts/strategists) to get caught up in the minor week-to-week oscillations of the U.S. stock market, especially when the trading ranges have been so small. But it's important not to lose sight of the bigger picture. In this week's Market Outlook, we will look at some simpler, longer-term charts that hopefully will help you stay on the right side of the market amid all of the near-term noise.
Numerous Market Headwinds Still Exist
In last week's report, I pointed out an emerging bearish chart pattern in the Russell 2000 that warned of a 4% decline in the small-cap index to 1,175. In previous issues, I have also been pointing out a growing list of red flags for the market. These include:
-- Major overhead resistance at 5,133 in the Nasdaq Composite, which continues to be negotiated;
-- Bearish third-quarter seasonality in the S&P 500; and
This week, extreme investor complacency is yet another reason to believe an extended stock market advance is unlikely from current levels, at least without a deeper corrective decline first.
The Volatility S&P 500 (VIX) finished last week at 12.12, a level that has historically indicated extreme investor complacency. This is a contrary indicator and has previously either coincided with or closely led almost every near-term peak in the S&P 500 over the past 12 months.
I view this chart as another reason not to get too enthusiastic about the stock market just yet, even though the S&P 500 again held its 200-day moving average as underlying support last week. Adding new long positions with the VIX near 12 has not been a good near-term strategy over the past year.
Major Trend Still Up Despite Headwinds
Even though the PHLX Semiconductor (SOX) index has recently declined below its 200-day moving average, which is a negative, it is currently situated above even more important support at 641 to 626, which represent the Feb. 2 low and the November 2012 uptrend line.
Since semiconductor stocks tend to lead the technology sector, which tends to lead the broader market, how SOX resolves this test of long-term support should tell us a lot about the direction of the next significant price trend in the overall market.
Despite the potential red flags mentioned above, as long as this support holds it is too early to assume that a meaningful market peak is in place.
Another large-cap market bellwether, Apple (Nasdaq: AAPL), is also currently negotiating major support at $119.94 to $119.75, which represent its 200-day moving average and November high.
AAPL is the largest U.S. stock according to market capitalization and positively correlated to both the S&P 500 and Nasdaq 100. So, like with SOX, it is too early to assume a meaningful peak is in place in the broader market as long as this support is not broken.
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Putting It All Together
A growing list of indicators and metrics -- including historically low volatility, bearish chart patterns, overhead resistance in major indices and bearish August through September seasonality in the S&P 500 -- continue to warn of the broader market's vulnerability to a "real" correction of 10% or more between now and the end of the third quarter.
More importantly, though, major support levels in many key indices like the S&P 500 and PHLX Semiconductor index, as well as in influential stocks like Apple, continue to hold. This means the overall market's major trend is still positive. This is a very important distinction for individual investors to make because it's easy to get distracted by the minor week-to-week price oscillations -- especially in a market like this -- at the expense of the bigger picture.
As I have pointed out in previous issues, it is never a bad idea for intermediate-term oriented investors to put some money to work at major support levels. This is where the best risk/reward ratio exists and price trends tend to sustain themselves. But should the support levels identified above be broken, investors should already have a defensive strategy in place to protect assets and limit downside exposure. Plan ahead.
This article was originally published on ProfitableTrading.com: What Apple's Chart Says About the Broader Market