Market turns on a dime last week -- now, fundamentals will rule

The market turned on a dime this week. Pundits struggled to find a decent reason. An increase in the IMF's GDP forecast for 2010 was modest, a drop in weekly jobless claims was welcome but still modest, retail sales reports for June were mixed (though industry experts say June is generally weak so don't worry about it) and ISM Services were actually slightly lower that expected. Nevertheless, the herd swung into buying mode and stocks jumped 5%.

The debate now switches to whether the bull is back or whether this is just a flash in the pan rally,soon to be forgotten. The blogosphere naturally provides both sides of the argument. Well known investor and hedge fund manager Doug Kass declared we have seen the bottom for 2010 and it's upward from here. On the other hand, we have people discussing the possibility of Elliot Wave theorist Robert Prechter's call for Dow 1000. No doubt things will end up somewhere in the middle.

The view from Alert HQ --

In the meantime, let's look at where we are today. The data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6040 stocks and ETFs each weekend and gather the statistics presented below.

In the chart below we count the number of stocks above various moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).


In the last eight weeks, the majority of stocks have been below their 20-DMA more than half the time. This week, the majority is above. Though we see improvement, the majority of stocks we tracked are still below their 50-DMA for the third week in a row. It's hard to see on the chart but the number of stocks whose 20-DMA is above their 50-DMA actually declined slightly this week despite the surge in stock prices. That shows how deep the damage from the previous week was.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.


Barely 16% of stocks can be considered to be in an up-trend and that's after a week in which major stock market indexes rose 5% or more. More than a quarter of the stocks we track can still be considered to be in a down-trend and that is an improvement from last week when the number was close to half.

As for the stock signals at Alert HQ, the signs are very encouraging. Out of 94 Trend Busters, there was only one SELL signal. There were 220 Swing Signals, an usually high number, and every single one was a BUY signal. These are the stocks that have been first to break out and I encourage you to take a look.

The outlook --

It's all about earnings. This coming week is considered the start of second quarter earnings season with Alcoa (AA) reporting on after the close on Monday. Other big names bellwethers include Intel (INTC), JPMorgan Chase (JPM), Google (GOOG), Bank of America (BAC), Citigroup (C), and General Electric (GE). Results are generally expected to be good as year ago comparisons are relatively easy. Investors, worrying about a slowdown in the second half of this year, will be paying the most attention to forward guidance. Management statements will be analyzed with a fine tooth comb.

In addition to earnings season, there is a pretty big slate of economic reports to be released this coming week. We will see more retail sales reports, export/import prices, business inventories and minutes from the last Fed Open Market Committee meeting. Thursday is a big day with initial jobless claims, continuing claims, Empire State manufacturing index, industrial production, capacity utilization and the Philadelphia Fed manufacturing index. Finally, on Friday we get CPI and the Michigan Consumer Sentiment survey.

With earnings and data coming at us in mass quantities, perhaps the market will finally begin to be ruled by fundamentals rather than fear and computers. At least that's my hope. In any case, there's lots going on this coming week so hold on to your hats.