Too many bears calling a market top?
There is a possible double or “rounding” top in the price charts of the major market averages; the underlying technicals (stochastic, MACD, Williams, Money Flow, and Price Rate of Change, etc.) reflect a market under pressure. Clearly, and there is no shortage of pundits calling for a “top.”
Shorter term, we have had four rally failures since March 11, suggesting sellers are using any strength in the overall market to sell.
The source of selling can be attributed to the Fed’s new timetable for taper, a rise in interest rates, international tensions, uneasiness about the economic expansion, speculation in IPOs and biotechs, or all of the above.
If this is a top, it is a slow motion top, which is allowing everyone a chance to get out.
TODAY:
I’ll concede a quick shakeout before an April/May surprise surge with a more pronounced sell off this summer.
More often than not, the market does what is least expected. That spells “surge.”
Yes, it needs a catalyst, especially a spring rebound in spending and housing interest.
And don’t overlook a stabilization and increase in traction on economies abroad.
In a broad-based economic recovery, positives tend to unfold, as negatives are encountered and overcome. I’m using a very broad brush here, but the big picture is often obscured by micro-analysis.
The bulls need to hold the line above DJIA 16,215 (S&P 500: 1,842) to head off a test of support at DJIA: 16,105 (S&P 500: 1,833)
A close above DJIA: 16,298 (S&P 500: 1,855) would tip the scales slightly in favor of the upside.
Investor’s first read– a daily edge before the open
DJIA: 16,264
S&P 500: 1,849
Nasdaq Comp.:4,151
Russell 2000: 1,151
Friday, March 28, 2014, 9:16 a.m.
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ANOTHER 6% + CORRECTION BEFORE MAY – UNLIKELY
One of the Stock Trader’s Almanac’s great discoveries is the fact the stock market’s performance during thesix months between November 1 and May1 is far superior to the six months between May 1 and November 1.* The Almanac refers to it as the “Best Six Months.”
Over of the last 25 years, the “Best Six Months” has produced 19 up-years, 3 flats and 3 downers. The best years averaged gains of 11.8% with the best year up 25.6% (1998 – 1999).
Over the last 25 years, there have been14 corrections ranging between 6% and 16%, but more than one correction of this size during the Best Six Months was rare.
In 2002 there was a 6.2% correction in January and a 6.5% correction in March/April. In 2003, there was a 7.0% correction in Nov. 2002/December 2002 and a 12.9% correction in January/March of 2003.
So far, the DJIA is ahead 6.0% since October 31, 2013 even with a 7% correction in the interim. Another correction exceeding 6% is of course possible, but unlikely.
.THE FED:
Fed chief JanetYellen said in her press conference last week that the Fed’s stimulus program could end this fall and benchmark interest rates could rise six months later, which places a rise in rates in the spring of 2015 rather than the second half of 2015.
She also said the Fed was abandoning its threshold target of an unemployment rate of 6.5% for qualitative analysis of a broad range of data, including labor market conditions, inflation expectations and financial markets.
The Fed’s new target interest rate would be 1% at year-end 2015 and 2.25% at year-end 2016.
Additionally, she announced another $10 billion taper to$55 billion.
The only thing new here is the timing of a rise in interest rates, several months ahead of expectations.
At first the market plunged, then it rallied, but Thursday was followed by a rally failure Friday after a big spike in early trading – not good.
A word of caution. Initial responses can be deceiving, since institutional investors tend to crunch numbers in response to important changes in conditions. It is possible, they may consider an earlier change in interest rates as a negative and sell down to a level they think discounts the timing of the rise.
EUROPEAN ECONOMIES:
Manufacturing output , new orders and exports are up for the eighth consecutive month, suggesting its recovery is real, though not yet robust. Our economy has
scratched and clawed its way out of a horrendous recession without help from Europe. Obviously, a recovery there stands to accelerate the pace of our recovery here.
RUSSIA:
On Friday, Russian lawmakers considered legislation, allowing it to incorporate areas in other countries where residents want to secede in face of a dysfunctional central government. While commentary suggested this only applied to Ukraine, who knows for sure at this point ?
Russian nationalism is running high in Crimea and it can spread to other parts of Ukraine even countries that were once satellites to Russian control.
This suggest to me a risk of civil wars breaking out in countries where the Russian language is spoken.
For now this represents an uncertainty for investors, but that could change for the worse, and there is little the West can do about it. No one wants to fight a land war next door to Russia, and Mr. Putin knows it.
Sanctions are about the only deterrent the West has, but Russia has cards to play other than military, since it has economic ties to Europe, especially Germany.
But the price Russia will pay is steep – Its Micex stock index is down 11.6% this year, compared with a drop of 4.8% for the MSCI Emerging Markets Index; S&P and Fitch cut their outlook on Russia’s credit ratings to negative from stable, a downgrade is possible next; Russia may enter a recession in Q2 or Q3; the ruble has plunged; Russia’s borrowing costs have risen.*
This is not over, be forewarned.
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TECHNICAL ANALYSIS EACH OF 30 DOW STOCKS:
At key junctures, I technically analyze each of the 30 Dow Jones industrials for a reasonable near-term downside and a more extreme downside, as well as a near-term upside potential. I note the price for each, add them up and divide by the DJIA divisor (0.1557159) and arrive what the DJIA would be if each of the 30 stocks hit my targets.
As of Thursday’s close I concluded a reasonable near-term downside for the DJIA was 15,900, a more severe near-term downside would be 15,625. The near-term upside would be 16,511. That’s all assuming the overall news environment doesn’t change.
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HOUSING STOCKS – Watch housing stocks for a clue to the direction of the economy.
As spring approaches, the Street will be dissecting every morsel of economic data in search of how much of the recent slowdown in the economy is attributable to severe weather.
A logical place to snoop is the housing industry and stocks since they should firm up before the industry stats confirm a rebound
PARTIAL LIST:
Beazer Homes(BZH) Monday: 3/24: $19.64
PulteCorp(PHM) Monday: 3/24: $18.68
Toll Brothers (TOL) Monday: 3/24: $35.26
KB Homes(KBH) Monday: 3/24: $16.63
DR Horton(DHI) Monday: 3/24: $21.24
CONCLUSION:
Not only can sudden strength in these stocks signal an economic improvement, they can offer an opportunity, and should be tracked closely. If a green light is, imminent, the BIG money will be buying ahead of the news.
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THIS WEEK’s ECONOMIC REPORTS:
The economic calendar features important reports reflecting trends in manufacturing and housing.
These reports may still be adversely impacted by severe weather conditions.
For detailed analysis of both the U.S. and Foreign economies along with charts, go towww.mam.econoday.com. Also included is an explanation of each indicator. If you want to know when the next Employment report or any other key report will be released that info is also there under “event release date.”
MONDAY:
Chicago Fed. Nat’l Activity Ix. (8:30): Rebounded in Feb. to 0.14 from weather impacted minus0.45 in Jan..
PMI Mfg. Ix. (9:45):March’s PMI flash index hit 55.5, down from a spike to 57.1 for the final reading in Feb..
TUESDAY:
ICSC Goldman Store Sales (7:45): Same store retail chain sales dropped 1.5 pct. for the Mar. 22week Year/year is +1.7 pct.
FHFA House Price Ix. (9:00): FHFA home prices for Jan. were up 0.5 pct vs a gain of 0.7 pct in Dec.
S&P Case-Shiller House Price (9:00): Hme prices were up by this measure 0.8 pct. in Ja,. Year/year are up 13.3 pct thru Mar.
New Home Sales (10:00)Slipped in Feb. to 440,000 (ann. Rate) from 455,000 homes.
Consumer Confidence (10:00): Rose more than projected in Feb. to 82.3 from 78.3 in Jan.
Richmond Fed. Mfg, Ix, (10:00):Feb. dropped to a minus 6 from a plus 12 in Jan.. New orders were minus 9 vs plus 14 in Jan.
State Street Investor Confidence Ix.(10:00):
WEDNESDAY:
MBA Purchase Apps (7:00):Rose 3.0 pct. in week Mar. 21 week, Year-on-year still down 17.0 pct.
Durable Goods (8:30): Rose 2.2 pct in Feb, ex-trans up 2.0 pct.
PMI Services –flash (9:45): Feb. PMI index rose to 55.5 from 53.3
THURSDAY:
GDP(8:30): The 3rd Q4 est. was revised up to plus 2.6 pct. fron 2.4 pct. and a Q3 est. of 4.1 pct. (all annualized rates).
Jobless Claims (8:30): Dropped 10,000 for the Mar. 22 week to 311,000.
Corporate Profits (8:30): Q4 profits were $1.905 trillion vs 1.869 trillion in Q3 for an annualized gain of 7.9% vs. a 10.8% gain for Q3 over Q2.
Pending Home Sales (10:00): Fell 0.8 pct. in Feb. vs. a minus 0.2 pct. (revised) in Jan..
Kansas City Fed Mfg. Ix, (11:00): The Mar. index rose to 10 from 4 in Feb. and 5 in Jan..
FRIDAY:
Personal Income/Outlays (8:30):
Consumer Sentiment (9:55):
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RECENT POSTS:
Mar 7 DJIA 16,421 Pivotal Day in the Market
Mar 10 DJIA 16,452 Important Test for the Bulls Today
Mar 11 DJIA 16,418 Gold Due For a Play ?
Mar 12 DJIA 16,351 Crimea – How Big A Negative for Stocks ?
Mar 13 DJIA 16,340 Correction to Set Up An Opportunity
Mar 14 DJIA 16,108 Selling Climax Next Week ?
Mar 17 DJIA 16,065 Rally Failure Risk, But Trader’s Buy Looms
Mar 18 DJIA 16,247 Market Vigil – Economy and Russian Nationalism
Mar 19 DJIA 16,338 A Spring Break for the Economy ?
Mar 20 DJIA 16,222 Fed Reality – Market Up, or Down ?
Mar.21 DJIA 16,331 Yellen, Putin, Economic Freeze, Quadruple Witching Friday
Mar 24 DJIA 16,302 BIG Test for the Market Today
Mar 25 DJIA 16,276 Bull Top Unlikely – Why
Mar 26 DJIA 16,367 Bulls Must Beat Key Resistance Level
Mar 27 DJIA 16,268 Rally Failures = Lower Prices – Opportunity !
A Game-On Analysis, LLC publication
George Brooks, Sole Member,Manager
“Investor’s first read – an edge before the open”
The writer of Investor’s first read, is Game-On Analysis,LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized investment advice or as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk. Brooks may buy or sell stocks referred to herein.
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