Here's a quick update on how U.S. stocks have recovered since the August 24th flash crash. Three weeks have passed which is enough time for investors to be able to gage support and resistance levels for major indexes. In addition, we can take a look at what leading stocks have done in the period to see if they offer any support for the likely near-term direction of stocks.
Before we look at the charts let's add a little context. Economic data in the U.S. and globally continues to disappoint and has been unable to sustain a recovery in GDP that would normally be associated with an economic recovery from a severe contraction. Central Bank policy action has been effective at driving asset prices higher. This is a dangerous combination and why investment decision at this stage may be more complicated.
China's slowdown was starting to pull down that country's stock market earlier this spring and emerging markets in general have been struggling the last few years. The iShares Emerging Market ETF (EEM) is trading at the same level to day it was trading at in 2010.
Those countries, both emerging and developed, that rely on natural resources as a major source of exports have also been struggling as prices for commodities have been tumbling.
About the only thing working in the current environment is asset inflation and primarily in the U.S., Japan and somewhat in Europe.
In terms of corporate sales and earnings it appears we may be in the early stages of a contraction. Third-quarter numbers will be reported in October and should provide more context regarding the direction these numbers have taken the last couple of quarters.
From the July 20th close the S&P 500 and has corrected around 8% as of September 11. At the depth of the correction stocks were down 12%. Normally this would be a classic correction but to have the majority of that downward move take place over three trading days is less than ideal especially when you consider other global stresses in financial markets related to commodity prices and currencies.
As you'll see in the charts below we have a pretty good picture of where support and resistance currently sits. At present I am focuses on upside moves as stocks attempt a recovery.
None of the following commentary is a recommendation to buy or sell. The information that follows is simply my market observations.
Here is a look at the Dow Jones Industrial Average ($INDU) since June.
Prices established a short-term down trend by early August leading up to the flash cash. Since then a clear trading range has been establish which should serve as reasonable resistance and support levels.
The strongest of the big U.S. indexes is the Nasdaq ($COMPQ). Here is a look at that chart.
As you can see, this index has a slight upward bias and is near breaking through short-term resistance. The Nasdaq's weighting in Information Technology, Consumer Discretionary and Health Care help explain it's stronger performance at present. Those industry groups are some of the strongest at present.
The S&P 500 ($SPX) looks more like the Dow, trading in the middle of the current range and further away from resistance.
Another area where we may get a clue about the near-term direction of stocks is from the real estate investments. A recovery in housing has been an important part of this recovery so I have been monitoring a few investments in this market.
Let's start with Home Depot (HD).
As the chart illustrates, HD was performing well leading up to the flash crash, one of the few stocks doing so at the time as broad markets were under selling pressure. Currently HD is holding its ground but not enthusiastically so.
Home builders (ITB) have been another bright spot in the economy and stock market.
So far this this iShares U.S. Home Construction ETF (ITB) is showing the strongest looking recovery, but it has been a very bumpy.
Turning to the commercial real estate sector we see a very different picture.
CBRE Group (CBG), one of the largest publicly traded commercial real estate managers, we see a stock that is trading in the bottom of its correction but is exhibiting some buying and sits at the top of its most recent price range. CBG was exhibiting strong performance earlier this year so its lack of participation in the flash crash recovery is disappointing.
Another broad look at the real estate investment market can be view in the iShares U.S. Real Estate ETF (IYR).
The date period for IYR has been lengthened to include the start of the year, when many REITs started to price correct. Obviously IYR is having a difficult time recovering from the current selloff. Given the importance in real estate in the current economic recovery, as well as its sensitivity to inflation, the picture stocks from these markets are showing has become less bullish. Still, there are signs for optimism and only time will tell if real estate related investments have the ability to help markets recovery from the current correction.
Next week we will hear from the Federal Reserve regarding interest rates. Markets are likely to be quiet leading up to their announcement. If they postpone raising rates stocks may get a boost. How stocks react if the Fed decides to raise rates may be more telling. We won't have to wait long.
In terms of leading stocks, I am seeing some strength. I manage a virtual portfolio which I will be sharing more details about in the near future. The portfolio currently holds the following stocks:
They all had a great week and have recovered well from the flash crash; a few are even moving into new high levels.
My watchlist candidates look fairly promising as well. Overall, the performance of the leading stocks I follow suggest investors be on the lookout for a continuation to the upside. As surprising as it may be given all the headwinds stocks face, it looks like they want to make another run higher.
It can all change very quickly and given the influence central banks are having on stock markets, it may be as simple as the Fed postponing their rate hike for stocks to reach new high territory again. I am definitely preparing to put money to work if stocks rally from here.