The market is tracking a drop of more than 5% this year.
That’s an ominous start for 2014 in that the direction of stock prices in January has historically signaled the general direction for stock prices for the rest of the year, and with an impressive degree of accuracy.
The S&P 500 closed out 2013 at 1,848, leaving a scant two days to rebound sharply from yesterday’s close of 1,774 before it breaks even, much less turns positive.
TECHNICAL ANALYSIS 30 DOW INDUSTRIALS
At important junctures, I technically analyze each of the 30 Dow industrials for a near-term reasonable risk, as well as a more severe risk, add up the totals and divide by the Dow industrials “divisor” (currently 0.155715905) to get what the DJIA would be if each of its 30 stocks hit my projected prices.
A reasonable Near-term risk would be 15,464; a more severe risk would be 15,124.
This forces me to look at each component and adjust for a distortion if one or a few stocks have had big enough moves to distort the DJIA.. Percentage moves in the DJIA’s high priced stocks moves have a bigger impact on the average than low priced stocks.
As we can see by a weak open, rallies like that yesterday can be dangerous. After a nasty decline like that seen to-date, rallies can suck investors in prematurely, resulting in an instant paper loss with the prospect of a greater loss to follow.
No one wants to miss the turn to the upside. For some, that is more wrenching than buying a stock that goes down.
What was deceptive about yesterday’s close is that it was near the high for the day, rather than near the low, which would have been a “rally failure,” typical of weak markets.
HOW FAR DOWN ?
Much depends on the news environment when the market gets to a point where it should rebound. I’d say 5.5% to 6.5% down, or DJIA 15,610 (S&P 500: 1,748) to DJIA 15,446 (S&P 500:1,730).
Compare that with my technical analysis of each of the 30 Dow industrials above of DJIA 15,464 (reasonable) and 15,124 (more severe).
Next, looking at a longer term price chart (Nov. 2012 – Jan. 2014) and you will find a one-third retracement of that high/low range at (15,270) and one-half retracement at 14,570.
Make the same calculation for the Oct. 13 to Jan. 14 period but use two-thirds instead and get 15,320.
Next, check the levels last year where the DJIA found support (14,700).
Next, track the daily market action. The first major attempt to rebound should come between 14,950 and 15,240.
Note: I picked a point a smidge below 15,000, because the press and pundits will make a big deal of 15,000 support and to be a pain in the butt, the market will probably break that briefly.
Assuming the news environment hasn’t changed when the market gets into this zone, there should be a serious attempt to rebound.
CAN TODAY BE A SELLING CLIMAX ?
The answer will be in any attempt to rebound. It would have to be on huge volume. The BIG money would have to conclude “enough.” We are going all in.
It’s Friday, I doubt it. Monday morning on a sloppy open with the DJIA off 200 points – maybe.
HOWEVER, IF THE NEWS ENVIRONMENT HAS WORSENED WHEN THE MARKET GETS TO THAT JUNCTURE, THE MARKET WILL DROP FURTHER.
Investor’s first read– a daily edge before the open
DJIA: 15,848
S&P 500: 1,794
Nasdaq Comp.: 4,123
Russell 2000: 1,139
Friday, Jan. 31, 2014 9:14 a.m. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
SUMMARY FROM MONDAY’S POST FOR NEW READERS
The recent drop in the market may be attributed to the following:
-Commentary by BlackRock Inc.’s CEO, Laurence D. Fink and GoldmanSachs’ Lloyd Blankfein essentially saying that the stock market is overpriced.
Fink used the words, “Way too much optimism,” Blankfein said, “It would be very abnormal if we didn’t have consolidating moves in assets that have gone up so much.” (ouch !)
-Then too there is growing concern for China’s economic growth. Its flash PMI (Purchase Managers’ Index) for January slid to 49.6 from 50.5; Industrial Production to plus 09.7 from 10.0; Retail Sales to plus 13.6% from 13.7%; GDP to plus 7.7% (ann.rate) from 7.8%.
–Fiscal turmoil in Argentina and Turkey and overall worries about the trend of Fed tapering is a worry abroad, though government heads here and abroad insist on a low interest rate policy going forward.
-Finally, POLITICS and the plunge in stock prices here.
It is possible the abrupt crunch in the market is also about the perception on Wall Street that due to Governor Christie’s G.W. Bridge scandal, the big Republican money not only sees its party’s front runner for 2016 in trouble, but the peripheral damage may hand control of Congress to the Democrats this year.
The stock market began to stall in the first week of January at the same time negatives surrounding Governor Christie and the G.W. Bridge story escalated, prompting the firing of key members of his administration. The crisis intensified, forcing Christe’s press conference on January 9 (DJIA:16,462), the N.J. State Assembly subpoenas on January 16 (DJIA: 16,417), and the U.S. Attorney for New Jersey subpoenas January 23 (DJIA:16,197), the day before Friday’s 318-point plunge in the DJIA.
Governor Christie had a comfortable lead in polling for 2016 Republican presidential candidates for two months until the Quinnipiac poll (1/15 to 1/19) when his numbers dropped sharply. While 2016 is well into the future, the mid-terms are not. Until now, the Republican Party’s control of the House has afforded them a counter to the Democratic White House and Senate’s agenda. If the Christie dilemma worsens.
Of course, if Governor Christie comes out of this looking good, it could result in enough of a boost in Republican sentiment to prevent a loss of control in the House.
This has not been a big hit. The S&P 500 had three meaningful corrections in 2013 (7.5%, 5.6%, 5.0%) and two in 2012 (10.5%, 8.6%) averaging 7.4% (Using intraday data).
Granted, conditions on each of those four occasions were different, but the market is much higher now. If the average of the five is applied to the DJIA, it would drop to 15,520 and to 1,720 for the S&P 500.
Not only does that suggest more downside, the severity of the decline in the last two days has created overhead supply of stock (sellers) that will be difficult to penetrate.
TODAY: (As of Monday Jan. 27)
The market will attempt to rebound this morning. Rebounds in a down market can offer good insight into the direction of the stock market near-to-intermediate term.
If this is an attractive level for the BIG money to load up, this market will roar. If the rebound lacks zip, the market is headed lower.
I suspect the BIG money is on the sidelines waiting for lower prices and that will enable sellers to wrest control of the market and take it down again.
RESISTANCE:
DJIA: 15,895 (S&P 500: 1,787)
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
RECAP OF WHAT I HAVE WARNED ABOUT FOR WEEKS:
Best Six Months to own stocks:
Over the years the Stock Trader’s Almanac* has expounded on its significant finding that the stock market performs better between November 1 and May 1 than between May 1 and November 1.
The Almanac’s “Best Six” goes back to 1950. The six months is a snapshot between November and May. Many major market advances often start before November, but the point made here is the period between fall and May is where the action is.
Is this going to be another “BEST six months to own stocks ?
The six months between November 1 and May 1, have consistently outperformed the six months between May 1 and November 1.*
With a 3.5% rise in the DJIA since October 31, the Street is now wondering if the market is off to yet another “Best Six Months.” Out of the last 25 years, Nov.1 to May 1, have produced 19 up-years, 3 flats and 3 downers. The best years averaged gains of 11.8% with the best up 25.6% (1998 – 1999).
THE DANGER: over the last 25 years, there have been 14 corrections ranging between 6% and 16% during this November1 to May1 period. Seven of those started in January, two in December and four in February.
TIMING – OPPORTUNITY STOCKS
The following are based on technical analysis only and are not to be taken as buy or sell recommendations, but as one of many factors that must be considered in the decision process. Comments do not take into consideration earnings reports, or changes in institutional ratings, company guidance. Technical analysis is based on one’s interpretation of the impact buying and selling have on the price of a stock and is therefore not an exact science. News and events can change an interpretation instantly.
Apple (AAPL: $499.78) Negative
Plunged $44 after disappointing prospects were reported for its iPhone and guidance Monday night. Hard to say what institutions will do. Broke $500 briefly Wednesday. Resistance starts at $505. Drop to $480 possible. Needs bigger buyer than Icahn.
Facebook (FB:$61.08) Positive
Got the move above $56 it needed to maintain positive status when solid earnings blew it out yesterday to 52-week high of $62.50. Could slip back to $58 – $59.
IBM (IBM:$177.36) Negative
Crushed by a disappointing earnings and outlook last Wednesday. Tried to stabilize Thursday, but volume unimpressive. Resistance is $179.- $180. Break below $176 tests $174 level.
Pulte Homes (PHM: $19.77) Positive
Surge in Q4 sales and earnings spiked stock well into heavy resistance area. Stock gave back all of its gain early in the day but perked up at the end of the day with a spike in volume. Can try again to break resistance $20 – $21.
First Solar (FSLR:$51.47) Negative/trying to turn
Nice move up yesterday, but volume mediocre. Risk of drop to $45 – $46 reduced by improving market action. Support is $50.30. Resistance $53 – $54.
Nike (NKE:$73.94) Negative/ Improving
Stock jumped sharply Thursday in sympathy with 21% jump in sports’ apparel manufacturer Under Armour’s (UA) surge in earnings. Support is now $73.
Hewlett-Packard (HPQ:$29.25) Positive.
Holding up well, but next big move to be signaled by move above $29.50 or below $28.50. Thursday’s move fell short, volume light, as well.
Polaris Inds. (PII:$127.69) Negative
Beat on earnings and revenues, but disappointed on guidance. Drop to $122.25 was reversed to the upside Tuesday, but market action Wednesday and Thursday unimpressive..
Amazon (AMZN: $403.01) Positive/Neutral
Big $18.81 point jump during day was reversed after the close on disappointing earnings and guidance.
Pandora Media (P:$36.53) Positive.
Goldman Sachs announced Thursday that P has a shot at doubling next year. Support now $35.30.
NOTE: I AM NEITHER LONG NOR SHORT ANY OF THE ABOVE STOCKS
THE ECONOMY:
The economic calendar is heavier this week.
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:
New Home Sales (10:00) Dropped sharply in Dec. to an annual rate of 414,000.
Dallas Fed Mfg. Svy. (10:30) January index rose for 9th month in a row to 14.4 from 13.1.
TUESDAY:
FOMC Meeting begins
ICSC Goldman Store Sales (7:45) +0.2 pct. for 1/25 week; 4-week average +1.5 pct.
Durable Goods (8:30) Dec. Durable Goods dropped 4.3% vs. a revised 2.5 pct. Nov.
S&P Case Shiller Home Prices (9:00) Nov. +0.9 pct. vs. +1.1 pct. Oct. y/y +13.8 pct
Consumer Confidence (10:00) Jan. index rose 3.2 points to 80.7 from 77.5 in Dec.
Richmond Fed Mfg. Ix. : Jan. index was 12 vs. 13 in both Nov. and Oct.
WEDNESDAY:
FOMC meeting announcement (2:00) no press conference.
THURSDAY:
GDP – 4th Qtr. (8:30) Annual rate of Q4 +3.2
Jobless Claims (8:30) +19,000 to 348,000 for Jan. 18 week
Pending Home Sales (10:00): Sharp drop in Dec. of 8.7 pct., all regions included. Less inventory to choose from, higher prices contributed.
FRIDAY:
Personal Income/Outlays (8:30) Proj:Dec. +0.2 pct. +0.2 pct Nov.
Employment Cost Ix. Q4 (8:30) Proj:+0.4 pct.
Chicago PMI (9:45) Proj: Jan. index 59.5 vs. 59.1 Dec.
Consumer Sentiment (9:55) Proj: Jan index 81 vs. 95.2.
2014
Jan 10 DJIA 16,444 Stocks: Sharp Run Up, Or Down in January ?
Jan 13 DJIA 16,437 What’s Needed to Trigger a Surge or Slide in Stocks
Jan 14 DJIA 16,237 How Ugly Can This Correction Get ?
Jan 15 DJIA 16,373 Correction ? Not So Fast, Says Nasdaq
Jan 16 DJIA 16,481 Stock Pickers’ Market – Rewards, Risks
Jan 17 DJIA 16,417 Stock Pickers’ Market – Where to Look
Jan 21 DJIA 16,458 Key Day in the Market – and Why
Jan 22 DJIA 16,414 Burden of Proof on Bears
Jan 23 DJIA 16,373 Strong Rebound Today = New High S&P 500
Jan 24 DJIA 16,197 Bulls – Goal Line Stand ?
Jan 27 DJIA 15,879 Christie – Mid-Terms – Market Plunge
Jan 28 DJIA 15,837 A Very, Very Key Juncture in the Market
Jan 29 DJIA 15,928 Mini-Bear ?
Jab 30 DJIA 15,738 Risky Rallies
George Brooks
“Investor’s first read – an edge before the open”
*Stock Trader’s Almanac
The writer of Investor’s first read, George Brooks, is not 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. 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.
