What’s Ahead in the Second Half of the Year?

Calling The Trend Column, by George Leong, B.Comm.

With the first half over, nothing was unexpected, as stock markets in the first half traded largely mixed with the broader market and small-cap stocks were lower. Technology attracted buying, as the NASDAQ gained about 12% in the first half. This is not unexpected given the continued interest in buying new technologies. Yet the technology sector could see some near-term pressure, as investor sentiment in the technology sector has been weakening, with eight neutral readings during the past 15 sessions.

Given the recent downtrend, the DOW is below a key breakout point of 8,400, the S&P 500 is below 900, and the Russell 2000 is at sub-500. We need to see some support here, as markets juggle sideways. There is no positive major news to lift stocks, so we could see continued mixed and sideways trading in the near term.

The World Bank came out and suggested that 2009 will remain a dangerous year, which is adding more jitters to stocks. The reality is that the renewed concern towards the global economies is pressuring stocks. Energy is also trending lower, with oil down below $64.00 a barrel.

In the near term, watch the key breakout levels and moving averages. The DOW is below both its 20-day and 200-day moving averages. The NASDAQ is hovering just south of its 20-day moving average; watch to see if the 50-day moving average at 1,729 holds. The S&P 500 is below its 20-day moving average and just broke below its 200-day moving average of 906. On the small-cap side, the Russell 2000 is below 500 for the first time since May 29. The index is below its 20-day moving average and its 200-day moving average of 495.

Stocks are moving lower. As of July 6, about 69% of all U.S. stocks are above the 200-day moving average, down from 74% a week earlier and from 72% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving average continuing to trend higher

Unless we see some oversold buying surface, the near term does not look good. The S&P 500 VIX continues to rise; a sign that volatility will increase as we move forward into the summer. Our concern is that stocks will hold near the breakout levels and avoid a major correction.

As we move into the summer months, there is a lack of any enthusiasm to drive buyers to bid stocks higher. We do not get a strong sense that markets will be rallying much higher unless we get major positive news on the economy in the U.S. and globally. And until there is a sense of direction, stocks could trade sideways.

As we enter the second half and third quarter, there is some optimism that things will improve, albeit we are not convinced due to the negativity on the first-quarter reports and continued weakness in the jobs and housing markets.

Get ready for any pre-earnings announcements leading up to the second-quarter earnings in a few weeks. The second quarter will be monitored for the guidance, as many are hoping that the economy will turn positive late in the third quarter or fourth quarter.