Market Breadth

Investors continue to be focused on whether the Federal Open Market Committee (FOMC) will raise rates on September 17th. The International Monetary Fund (IMF) and leading market managers are imploring them not to and that appears to be the direction they will go. That decision should lead to a short-term rebound in the market.

While the short-term will be driven by increased global quantitative easing and continued low interest rates, investors will eventually shift their attention to earnings and overall global growth in October. According to FactSet, the third quarter is expected to see a 2.6% sales decline and a 4.1% earnings decline for the S&P 500 led by the materials and energy sectors. According to Thomson Reuters estimates have already been lowered for 9 out of the 10 benchmark index’s sectors so far this year. Any earnings deceleration will further accentuate what I believe, to currently be historically high stock valuations based on overall sales revenues, cash flows and the corresponding lack of growth in both areas.

When breadth declines, it’s typically followed by a market correction. Market breadth continues to be weak as investors squeeze funds into a smaller number of well-known, high quality momentum stocks. This should continue through the window dressing period at the end of September.

China’s economy also continues to slow. The IMF warned that China’s slowdown now threatens global economic growth. This would further impact commodity prices and China’s trading partners.

The S&P broke down below the key 2000 support price level and retested the lows of August 24th. This is classis retest of a low price level which typically points to a short-term to mid-term bounce after the first and second test. Based on our proprietary PPOI (Psychological Points of Influence) technical indicator – if the S&P 500 is unable to break above the 2000 price level and stay there in September, we should see another quick but rapid market decline in October due to high margin debt levels and tax selling. A lot will depend on how investors react to global stimulus programs, lower oil prices, a slowdown in China and the anticipated deceleration in earnings.