Charts Say Beware of the Week Ahead

Last week, investors apparently "bought the dip" to support at 2,121 in the S&P 500, which I discussed in the previous Market Outlook. However, the rally was led by the small-cap Russell 2000, which gained 2.4% and is now up 10.5% for the year compared to just 5.9% for the benchmark S&P 500. 

In this new era of concerted monetary stimulus by central banks around the world, investors have been trained like Pavlov's dog to fearlessly buy every minor stock market decline because they are confident that central banks -- including our Federal Reserve -- "have their back."

This complacency in the marketplace has certainly kept stocks from going down over the past few months, but the lesser-known fact is that it has also capped the market's upside. The S&P 500 finished last week at 2,165, almost exactly where it was two months ago.  

Investor Complacency Cuts Both Ways

This week's first chart is one that I have brought out on several occasions this year to remind readers that too much complacency can be a bad thing. 

The Volatility S&P 500 (VIX) index finished last week at 12.29, a multiyear low, indicating investors are collectively unafraid of a market decline. Such extremes in complacency have either coincided with or closely led most near-term peaks in the S&P 500 during the past two years.

S&P 500 VIX Market Outlook Chart

So, while investors' buy-the-dip mentality helped attract new buyers at underlying support at S&P 500 2,121, this chart suggests this same fearlessness is also keeping the market from moving meaningfully higher -- at least not without another pullback first.

Seasonality: Beware the Last Week of September

The next chart shows that a market pullback is statistically likely to begin this week based on data since 1957. The final week of September is by far the seasonally weakest of the third quarter, declining by 0.73% on average and posting a negative weekly close 61% of the time.

Moreover, seasonality data for October shows that this seasonal weakness extends until the last week of October, which is historically the second weakest of the entire fourth quarter.

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Utilities Present Opportunity in a Dull Market

While I continue to believe this is not a good place for investors to aggressively put new money to work in the broader market, the utilities sector may offer a tactical alternative while we wait for the market's overall malaise to blow over.

Utilities are typically defensive in nature and tend to do well when the broader market is weakening, as the previous two charts warn may be occurring now. Additionally, Asbury Research's own asset flows-based metric shows that investors have recently been moving assets out of other sectors and into utilities. As long as this continues, it is likely to fuel the sector's relative outperformance.

As for individual names, Duke Energy (NYSE: DUK) recently tested, held and rebounded from its 200-day moving average, a widely watched major trend proxy.

DUK Market Outlook Chart

I would view a sustained rise above DUK's 50-day moving average at $82.48 as evidence that the stock's major uptrend, as defined by its 200-day moving average, is resuming. This could clear the way for a retest of the July 6 high at $87.31, which is 5.8% above Fridays close.

Long-Term Interest Rates Test 2016 Trend

After hitting a closing low of 1.37% on July 5 (which was near its lows of the past century), the yield of the benchmark 10-year Treasury note rebounded 36 basis points to close as high as 1.73% on Sept. 13, before falling back to close at 1.62% on Friday. 

The sharp rise in yields into mid-September tested resistance at 1.71%, which is made up of the lows from February, April and May. Major resistance from the 200-day moving average is situated just above that at 1.78%.

TNX Market Outlook Chart

As long as this resistance is not meaningfully broken, the 2016 trend of declining U.S. interest rates remains intact. I would associate this with a market that is not expecting a significant or immediate rise in interest rates by the Federal Reserve, perhaps not even until 2017.  

Conversely, a sustained rise above 1.78% would indicate a major trend change and clear the way for a test of the next key level at 1.94% to 1.98%. I would interpret such a move as an indication that the bond market is pricing in a more hawkish and aggressive Federal Reserve heading into the new year.

Putting It All Together 

My intermediate-term market outlook (for the next one to two quarters) remains positive as long as the major indices do not break below their late-June Brexit lows. However, in the near term, record low volatility and 60 years of seasonality data are warning investors not to chase last week's rally. 

Instead, traders should consider tightening stops on existing positions to help protect themselves from a potential market pullback and look to utility stocks like Duke Energy for a long opportunity in what has otherwise been a flat, non-trending market.

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