Counter Trend Rebound In U.S. Stock Prices Nearing Exhaustion

Most major U.S. stock market averages are up between 7% and 13% since their August 24th panic lows. However, I now believe that this rebound is a counter trend rally, and that the early summer all-time highs in most major indices will NOT be exceeded (or even tested). 

In my technical work, I see several longer term stock market cycles peaking between now and the end of this month.

On the fundamental side, I would be very surprised if 3rd quarter corporate earnings reports provide significant upside support for stocks, and I would not be surprised at all if 3rd quarter earnings reports were actually negative relative to expectations, on balance. While the energy and mining sectors may be bright spots immediately ahead, the rest of the market looks poised on the precipice of a major downturn which will significantly violate that August 24th panic lows.

While I think my computer trading system did well in navigating this latest rally, I now believe that the weekly chart sell signal in the S&P 500 Index from July 24, 2015 is the dominant signal (see chart below). The counter-trend rally which has unfolded since the panic lows of August 24th looks tired to me.

S&P 500 Index Weekly Chart with 75-Week & 150-Week Moving Average Lines & Computer Signals

The Key To The Next Major Swing In Global Financial Asset Prices?

Is this the key to the next major swing in global financial asset prices?

The Bloomberg China Monetary Conditions Index, a gauge that includes inflation-adjusted interest rates and the exchange rate, improved for a second straight month in August. This is the first back-to-back monthly gain since 2013. 

 

The HSBC China Monetary Conditions Indicator also rose in August (to a 6-month high) after stalling in July. The Bloomberg and HSBC China monetary gauges are designed to give a sense of how monetary conditions change over time, with higher values indicating looser monetary conditions and lower values signaling tightening by the central bank (PBOC).

Bloomberg Monetary Conditions Index (thru August 2015)

Several major stock sectors in the U.S. market were pummeled last week including steels (-20%), biotechs (-12%), industrial commodity mining stocks (-10%), and big pharma (-5%).

However, the S&P 500 Index was down only 1.36% last week, while the Nasdaq Composite Index and the Russell 2000 Index were both down around 3% last week.

After a quick look at the charts, you could say that we are in the process of testing the panic lows set in the U.S. stock market on August 24th. My own view is that the final top in this 6-year bull market isn't in yet and that the August 24th intra-day lows will hold in most major averages on the current correction. Can we rally from this area to new all time highs? Probably yes!

Is China a major variable in this key mix of factors that will determine the next major swing in financial asset prices? You bet! And as written in this column recently, my view is that China central planners, including the PBOC, are going to be successful in stabilizing Chinese financial asset prices and also in stimulating the Chinese economy to sustained growth above 7% again. The above chart strong suggests that progress is being made in Asia's most important economy.

In the interest of full disclosure, the average mix in all my managed accounts now is 15% intermediate-term blue chip U.S. corporate bonds and 85% cash! Quite frankly, I just don't have the courage here to listen to the computer-generated buy signals that my computer system has triggered recently.

S&P 500 Index Weekly Chart with 150-Weekly Moving Average Line and Computer-generated Buy & Sell Signals

And how about the precious metals mining shares? Again, I think current share prices in most major gold and silver mining shares represent a "generational" buying opportunity, but the gold bug in me is just too strong right now to make unbiased investment decisions in this unloved and under-weighted sector.

However, I leave you with this very interesting chart of Stillwater Mining Corporation. Stillwater is the largest North American miner of platinum and palladium. Volkswagon's potential recall of 11 million automobiles for repair of emissions issues has created a frenzy in palladium prices. Who's to say how long the palladium and platinum markets will be impacted by auto emissions issues globally, but I suspect that this advance in Stillwater Mining Corporation has room to run and that the rally in palladium and platinum prices has really just begun!

Stillwater Mining Corp (SWC) Weekly Chart