Labor Day is over and investors witnessed a quiet weekend.
There were two noteworthy news Headlines this weekend. The first headline was: "Merrill Lynch & Co. cut its earnings estimates for regional banks, citing risks to economic growth.
The second headline was: "U.S. investors are returning from summer vacation to the cheapest stock market in almost 12 years, and some of the biggest fund managers say they're ready to load up on shares of technology, energy and industrial companies."
One headline has negative implications, and the other headline sounds like a rose garden. These conflicting messages are actually a good reflection of what investors are feeling ... "Concern and fear about the future, and rising hopes because many stocks appear to be bargains."
If banks are in trouble relative to future earnings, that bodes trouble ahead for the economy, lending, and consumer spending. That would fit it with the recession expectation that many analyst are touting.
Below is a chart of the Banking Index. Clearly it has broken its 5 year support line. For the past two weeks, it has remained below its support. Its price bars are showing a consolidation from which a break out will occur soon. Merrill Lynch has cut earnings estimates for regional banks ... does that now take precedence and send the bank stocks lower? Or, do bargain hunters scoop up what they think are under priced value deals?
The answer will become apparent, because the consolidation pattern will break out soon. Bank lending, and liquidity are important factors in consumer spending, so what happens here will give us a better hint about what the odds are for a recession.
The second headline suggested that technology stocks were a bargain, so let's look at the (SOX), Semiconductor Index.
Let's look at its 4 year chart. What we see, is a very wide trading range. The top resistance of the range has now been reached three times, with each occurrence resulting in a reversal.
Each reversal has seen the SOX move down to its support line before bouncing back up.
Except ... this reversal has not moved down to its support yet, and it is holding above a one year support line as seen below. While we may get a short term up move, the pattern is more suggestive that the SOX will move lower to its 405+ support from a longer term perspective.