Fred Goodman's MarketMonograph Free Sample

AT A GLANCE: The Daily Rating is negative but will turn positive on Wednesday. The 3-day VIX sell signal ends today, and we may see the market bounce at 10 AM when the ISM Manufacturing Index is released. A new Summary Index sell signal was given last week, but with just three positive indicators remaining, a Quick Summary Index buy signal is possible at any time.

Please Note: I will be traveling the next two weeks. Reports will be posted on Mondays, but the coverage of economic indicators will be limited after this week's report, until I return.

Trading Notes: BOND is trading below its stop now that it has gone ex-dividend. We will give it just a bit of latitude from here, but we are examining the PowerShares Chinese Yuan Dim Sum Bond ETF (DSUM) for up to 5% of our portfolio and may switch another 5% into MINT. We will advise should we decide to make these changes.

Our stops are holding in our "don't get left behind" trades in QQQ and SPY. However, QQQ closed just 0.55 points above its stop (72.70) and SPY closed 1.05 above its stop at 162.40.

The S&P 500 finally put a dent in the string of new highs that began in April. The current chart is shaping up like the others that followed strings of new highs after long periods without them.

The closest we have come to the current string of new highs was in 1972. At that time, after a second brief series of new highs following the first one, a serious market break occurred. If we continue to copy 1972, there will be a rally towards the end of June followed by a steep decline.

The Daily Rating has a mediocre record, but last Tuesday's sell signal made up for past deficiencies. The S&P 500 is down 1.8% since the signal, but the indicator will give a new buy at the close Wednesday. However, the market may not wait that long before moving higher since several recent economic indicators suggest that the very influential ISM Manufacturing Index will be strong when released today at 10 AM.

Another positive influence on the S&P was the VIX 3-day buy signal that occurred on Wednesday. The signal has one day to go to recover the 1% S&P decline that has occurred so far, but much of that may be reversed, since the first trading day of the month is often strong.

I'll admit that I would prefer to see a bigger correction before the market reverses, but there are several short term positive factors developing, not the least of which is the fact that just 3 positive indicators remain, so a Quick Summary Index buy signal is possible.

However, there is still considerable evidence, both technical and fundamental, suggesting the summer will be volatile.

For a while the stock market may continue to move higher on bright expectations and on emotion, but eventually corporate earnings must materialize or it will come crashing back to earth.

That's why it's of concern to see a fairly sharp decline in corporate profits, as reported by the Bureau of Economic Indicators (BEA). The raw figures show profits have returned to below the level reported in September. Previous peaks have been followed within 1-3 quarters by market declines (red arrows).

The other indicator of concern was lumber, which often leads other commodities. The home-building industry has been very strong, but it has been softening of late, which probably has a lot to do with the sharp decline in lumber prices.

Now the good news. The Case/Shiller Home Price Index 20-city composite made major strides in March, with many in the industry predicting further increases. Here in Los Angeles it is thought that prices will gain another 11% in the next 12 months, after adding 14.3% in the last 12.

Ninety percent of the cities in the 20-city composite average were gainers in March, and 75% have gained for the full 12-months.

Pending Home Sales are climbing again, but the National Association of Realtors is complaining about inventory shortages, which are not likely to be corrected as long as builders continue to reduce the number of new units in production.

In May, the Business Barometer from the Chicago Institute for Supply Management moved sharply higher to its highest level in a year. At 57.9 it indicates that business is expanding, and the indicator has often served as an early indication that the Manufacturing Index from the Institute for Supply Management will also move higher.

The ISM Index will be released at 10 AM today, and it has frequently moved the market dramatically, at least for the short term. This, coupled with the fact that the first day of the month usually offers a spurt of new money to the markets, could provide at least a temporary respite from last week's weakness.

The increase in real personal income reported by the Bureau of Economic Analysis (BEA) is also likely to provide support. Not only was it reported up by 0.34% in April, but the March level was also revised higher by an additional 0.38%.

The 1.80% year-over-year growth is not earthshaking, to be sure, but it is at least back to the level of growth seen for most of 2012.

The Conference Board Consumer Confidence Index (dashed line), which is based on a survey of 5000 US households, is a blending of the participants' opinions about the present situation and their expectations for the next six months.

Expectations stopped falling last month but remain considerably below those held a year ago. The interpretation of the present situation remains stable, at the same level it held in December.

The State Street Global Confidence Index -- based on an analysis of actual dollars invested by institutions in North America, Europe and Asia -- increased again last month, though not at the rate it showed in April.

Much of the increase in the three-month average of the Global Index (pink line) was due to a recovery in Europe, while North American stocks slowed down. This could be a harbinger of a continuation into June of the weakness we saw last week.

When the Global Index moved higher in the past the S&P 500 generally moved higher with it. However, a reversal by the index has been followed by a market decline within 1-3 months.

The VIX Index was up sharply last week and has gained 31% since its low on May 17. The VIX Oscillator is back above 80 at 80.61, but it has not yet given a buy signal on the index and it won't, since the index is now 16% overbought. The very strong VIX adds to the likelihood that the S&P 500 will bounce today, but the VIX 3-day buy signal on the S&P ends at the close.

Last week's spurt by the VIX Index calls further attention to the reversal of the pattern of lower lows we discussed last week. A higher high by the index will suggest that the S&P 500 correction will continue.

The three Short Trend Indicators (STI) are within a few days of full-fledged sell signals. The S&P 500 indicator pair is closest and will give a signal on Wednesday if the S&P loses 16 points by then. It will take the NASDAQ an extra day, but if it loses 63 points by or after Thursday a sell signal will occur.

The Dow needs at least five days for a sell signal, but it must only lose 50 points to 15080 to give a sell signal. All three Swing Indicators (SWI) are now falling to zero where sell signals will occur if the STIs have turned neutral by then.

The Summary Index produced a regular sell signal on Wednesday when it fell below its sell signal trigger at 17. However, since we currently have 16 negative, 10 neutral and just 3 positive indicators, the indicator can reverse to a Quick Summary Index buy signal if just 4 more indicators turn positive.

The S&P 500 200-day moving average (green line above) gained 4.91 points last week to 1489.81 while the 50-day moving average (blue line above) added 7.47 points to 1599.64. The averages are still moving higher and are separating, but their rate is slowing

The Trend Indicator (pink line below) reversed and has fallen 0.34 points to 15.22. However, it has a long way to fall before it switches out of the Uptrend state. Nevertheless, a declining indicator suggests a weakening market, even before it enters the Downtrend state.

The S&P 500 14-day Relative Strength Indicator (RSI) fell below its mid-line to 48.8% and will turn neutral if it reaches 40%. There is little doubt that that will happen, since the RSI will reach 25.7% at the end of the week if the S&P simply remains where it is.

The indicator will turn negative if it falls below 30%, but any move lower will suggest a significant correction is likely.

The S&P 500 Price/Volume Chart narrowly avoided both bullish and bearish signals several times in the last two weeks, but it finally completed a clockwise continuation sell loop on Friday when it closed below its trendline at 1650.

To confirm this sell signal the index must close below 1650 today, preferably on higher volume. However, it is unlikely that the volume will be that high on a Monday, but it is equally unlikely that the S&P will close above 1650, so the sell signal will need support from other indicators.

There is likely to be support from the S&P 500 Long Term Price/Volume Chart, since it will fall below its uptrend line today. It can avoid it only if the S&P moves above 1650 or the volume is less than it was on the Friday before the Memorial Day holiday.

The SPDR Gold Trust (GLD) Moving Average Oscillator is now 9.8% oversold and within a small fraction of its lowest level ever. When it eventually turns higher we are likely to see gold stop falling for a while, even if there's no significant rally.

The Average Signature moved up and down several times last week and closed at 585. It remains high because so many stocks are still overbought according to their signatures.

We will not see the indicator turn positive until it recovers after first falling below its buy signal trigger at 345. However, the indicator is too strong to be considered negative based on its still very strong 50- and 200-day moving averages, as you can see in the second chart below.

Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. To send Fred your questions or comments, click here: Fred@MarketMonograph.com. E-mail sent to Fred may be edited for clarity and brevity and published on this web site, and may include your name unless you request anonymity or specify not for publication. The charts and commentary represent what Fred thinks about the market and what he is thinking of doing for his own account and for accounts he manages at the time of writing. Fred, his clients, or his family may have positions or may make trades in securities mentioned in these commentaries. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. Copyright©2001-2013 Fred Goodman. All rights reserved. For information purposes only, offered as a periodical of general circulation; not to be deemed to be recommendations for buying or selling specific securities or to constitute personalized investment advice. Derived from sources believed to be reliable, but no warranty is made as to accuracy.