The US stock markets have been trading erratically in recent weeks and months giving off confusing signals, limited upside trends and an overall increasing confusing pattern due to uncertainty in the Eurozone and more recently in China. Despite however all the recent weakness which was seen across all key stocks and indices, last week’s trading left the markets in good overall shape for the near term future, with an accumulation of buying pressure, a sign which usually appears before solid bottoms are made. More specifically, it is leading indicators that now warn of an imminent bottom in the US markets and a continuation of the rally.
Investors and in particular institutional investors and money managers watch such patterns closely, and they are willing to sell off shares as markets plummet so as to buy them again at a lower price few days later, and as of last week’s that seems to be the case, the markets sold off sharply while fresh buying pressure started to accumulated on the sidelines. This pressure is created by the nature of the sell off, and it is very hard to tell which sell off will continue and which will stop at a bottom, in this case however the odds strongly favour an end to the sell off and the creation of a medium term bottom, if not a long term one. This buying pressure hits the markets in matter of few days, is kind of like seeing the clouds on the weather satellite just few days before the storm hits… and these trading signals, though rare as they happen only few times a year, are proven very reliable.
Key stocks such as Apple, and indices such as the Russel 2000 and the DAX in Germany provided little signs of hope of a bottom, except maybe some small bullish divergence on the Apple chart, but divergences of short duration are not reliable enough to be taken seriously on their own. The good news however comes from leading indicators and the actions of money managers, they way they were selling shares last week, does indicate through these indicators, that they are only doing so in order to collectively drive prices lower so as to buy them again, within days!
For the longer term, investors expect the US markets to keep on rising as and when they set their bottom this coming week, the continuation of the rally to all time highs will still depend on the direction of European stocks, hence paying attention to the DAX index is essential. Regardless of that however, we may see the Dow Jones rally by as many as 1000 points from this expected bottom, before losing upward momentum. More specifically investors are watching the Russel 2000 index in the US and the DAX index in Germany, stocks of interest at this time is Apple (AAPL) and Deutsche Bank (DB). If these stocks manage to pull back above their 200 day moving averages and steadily keep on moving higher, then the rally in the US markets will continue all the way to the expected all time highs, probably this year. These are the stocks to watch once the expected rally starting from the bottom, that the leading indicators indicate, finally runs out of momentum. A momentum which can easily push the Dow Jones up by 1000 points before things become more volatile again.
In more detail, the Dow Jones and the SP500 will possibly rally more for the rest of the current year than the Nasdaq will, as high technology stocks will not be leading as much. Apple stock however remains as relevant as ever, and it is still considered the barometer of the Nasdaq index. The expected lagging of the Nasdaq relative to other indices may eventually be too small, almost difficult to notice and therefore not important at all.
In addition to the leading indicators, the expected bottom and rally are also in line with seasonal patterns, as market do have a higher probability of rallying during late August. The most important thing to watch throughout September will be the aforementioned stocks and indices, as these will remain relevant for a while, until some other indices or stocks become more relevant. So the bottom line is that last week’s sell off is seen as a false decline and as a false sell signal by investors, and they are already willing to become buyers soon, it is unclear whether stocks will set a bottom early next week, or slightly later, but these leading indicators are usually very right and not off by more than one day.