Crunch Time

The stock market started a new week on the downside for most sectors and industry groups. Last week's rally brought most benchmarks back up to areas where technical resistance was expected, so the weakness today was not a great surprise. What everyone wants to know, of course, is whether the next big move will be up or down. A period of sideways consolidation is a third possibility, and in our view is more likely than a near-term breakout in either direction.

Bullish analysts, perhaps anticipating further volatility, are now arguing that a retest of the August lows would be helpful in providing the foundation for a new uptrend. This is certainly true, if we assume a retest would be successful. The opposite is also true: a failure to breakout above the July peaks would signal that equities are running out of upside potential. Until the S&P 500 can break decisively above 1560 or below 1375, the next long-term trend remains anyone's guess.

Sector leadership is still rotating quickly. Energy and materials bounced back over the last week, as did technology. These recoveries took place with relatively low trading volume, which suggests they may be less significant than price levels make them appear. Financial services, consumer discretionary, and real estate stocks remain relatively weak. Overseas markets, Asia in particular, staged a sharp rally today. Chinese stock benchmarks are hitting new highs, which is more than you can say for the more-developed markets. Today the SPDR S&P China ETF (GXC) jumped +7.5%.

The news calendar is fairly quiet this week. Ben Bernanke speaks at the annual Jackson Hole economic event on Friday and will be closely watched for hints of future interest rate actions.