This holiday-shortened week has three major economic reports due out. Tuesday morning is the Institute for Supply Management (ISM) Manufacturing Index August report. The consensus calls for a reading of 50 which means manufacturing is neither growing or contracting. Whether the number is a little above 50 or below, the manufacturing sector is not doing much. Thursday has the weekly Initial Jobless Claims report. Consensus is for jobless claims to come in at 370,000 the same expectation of the previous week. The actual number last week was 374,000. Again, this number is at such a level that a move a few thousand above or below doesn’t matter. Unemployment seems frozen between 8% and 8.5%. Finally, Friday has the official August Employment Situation report. Consensus is calling for new non-farm payroll jobs to grow by 125,000 compared to July’s increase of 163,000, and the unemployment rate to remain at 8.3%. All of these numbers have one thing in common…we are mired in a plow horse economy.
The New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 60.03 up from 59.79 the previous week. This is the eleventh consecutive weekly increase for this important technical indicator. I have noticed also that this is the third weekly drop in the rate of improvement meaning that the pace of improvement is slowing which typically happens before we get a drop in the NYSE Bullish Percent. For now, however, positive momentum remains in US stocks. The overbought reading for the S&P 500 continues to fall and closed Friday at 35%. Looking back over ten weeks, the S&P 500 is getting less expensive and is clearly not in the extreme overbought range which I believe begins at 100%. I have reported that fixed-income, bonds, has been the most overbought and therefore expensive asset class. Even with the recent strength of US Treasuries, bonds as an overall asset class is now 77% overbought, high, but not extreme and well below the 120%+ readings of just a few weeks ago. Only the Corporate High Yield bond sector is overbought by more than 100% at 125%. Emerging market stocks have shown the greatest weakness and are now overbought just 14%, the lowest of any stock sector.
The Dorsey Wright & Associates analysis of the markets indicate that US stocks and Bonds are the two favored major asset categories followed by Foreign Currencies, International stocks, and Commodities. Middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization weighted indexes. Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks. The relative strength sector weightings favor Consumer Discretionary, Real Estate, Information Technology, and Health Care. US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.
The fiscal cliff is looming, but for now all eyes will be on Europe.