Stocks opened the week on a positive note as short-covering continued in the commodities markets. Copper prices rebounded strongly as expectations for additional stimulus in China mounted. Oil prices remained stable in the mid $40s following the big short-covering rally a week ago. If these commodities can hold rebound levels over the coming days, it will be positive for equities.
The rally came in the wake of weak Chinese trade data. Imports dropped 14.6 percent versus August 2014, reflecting a weak domestic economy. Some of the decline was due to falling prices as oil, copper and other raw materials tumbled, but the volume of trade fell too as China imported fewer barrels of oil and fewer cars. Hopes for a stimulus in the wake of the report, or fear of it on the part of commodity shorts, sparked buying in markets heavily influenced by Chinese demand. China trade surplus increased 40 percent from July and is close to all-time highs, a bad sign for the economy because China is supposed to be rebalancing towards a domestic, consumption driven economy. Later in the week, Chinese inflation data will be closely watched by traders.
In the United States, the countdown to the Federal Reserve meeting is underway. The most important data point for economic growth is the wholesale inventory number for July, which will be released on Thursday. Rising inventories increase GDP estimates and decline to inventory subtract from GDP. A steady stream of strong data has caused the Atlanta Fed’s GDP Now model to raise its forecast for growth in the current quarter, to 1.5 percent.
Earnings data is very light this week. Kroger (KR), Palo Alto Networks (PANW) and Fuel Cell Energy (FCEL) are among the most familiar names reporting.
Based on short-term technical analysis, domestic stock market indexes are in limbo. Stocks opened the week almost equidistant from both low and upside resistance levels. Some positive signs are continued strength in homebuilder stocks. Investors may be betting on a rate hike spurring some sidelined buyers to purchase homes. Housing can be a major component of GDP growth when the sector is performing well and, if the market is correctly forecasting a rebound, it is very positive for both the economy and the stock market.
Another sector holding up well is technology. SPDR Technology (XLK) is about 5 percent away from its trading range that dominated for most of the year. Similar to the rest of the market, this level is now considered resistance by short-term traders and the bears will sell as these sectors climb back. If stocks move higher this week, we could see some sectors make bullish breakthroughs.
Finally, the largest stock in the S&P 500 Index and a top holding in many mutual funds, Apple (AAPL), has planned a product launch event tomorrow. In a week that is relatively light on earnings and economic data, this may be one of the bigger stories. Apple is down about 15 percent from its highs in July, versus the major indexes that are off about 8 to 10 percent. There’s more potential upside from a strong product launch given the recent underperformance.