SUMMARY:
As we enter a short week, the question that must be tormenting investors is, can we buy now after a sharp 8-day bounce by the DJI (+5.3%) and S&P 500 (+6.0%) ?
Friday, the DJIA and S&P 500 got within a whisker of both my “technical” support and resistance levels, suggesting the market is free-flowing, not overpowered by outside forces.
The DJIA has recovered a little more than two-thirds its recent plunge, the broader based S&P 5000 and Nasdaq Comp. have recouped nearly the entire losses.
The Russell 2000 lags.
New support is DJIA: 16,035 (S&P 500: 1,826).
Investor’s first read– a daily edge before the open
DJIA: 16,154
S&P 500: 1,838
Nasdaq Comp.: 4,244
Russell 2000: 1,149
Monday, February 17, 2014, 2014 9:05 a.m.
THIS WEEK’s FOCUS:
The focus this week will be on housing. It is a cornerstone in this economic recovery and must be on board for any meaningful recovery going forward.
Unfortunately, like everything else, housing data has been adversely impacted by the weather.
This week’s housing data (see ECONOMY below) may suggest a slump, but housing stocks may tell a different story. If their price levels hold fast in face of soft numbers, it may tell us the BIG money is looking beyond the weather-beaten data to buy ahead of a healthy catch-up in spring. Some housing stocks to watch:
Beazer Homes (BZH: $21.26): Trying to turn up after dropping from a January high of $25.34
PulteCorp (PHM: $20.02): Holding firm after rebounding from an August low of $14.23
Toll Brothers (TOL: $37.79): Putting in a strong performance after basing out between April and October in the $30 area.
KB Homes(KBH: $19.03):Grinding out a recovery after a May peak at $25.14.
DR Horton(DHI: $23.62): Recovering from a September – November base at $18 after a drop from its May, 52-week high of $27.45.
On the other hand, if the numbers are bad and the housing stocks tank, it would bode ill for the industry.
However, mortgage rates are still historically low, but won’t stay low indefinitely, encouraging home buyers to act sooner rather than later.
Horrendous winter weather conditions in the midwest and eastern states should not crimp the economy for more than another four more weeks (!!)
We don’t know whether the Street has reverted to its “bad news is good news” mentality, hoping enough of it prompts the Fed to ease off on its taper schedule, or maybe the Street is looking beyond these economic numbers to an economy that gains traction later this year and next year, hopefully with a boost from economies abroad.
Maybe the Street doesn’t care anymore, and just wants in, good news or bad, because the U.S. markets are where the action is. Money managers must put clients’ cash to work or lose the business. What’s more, they have to perform, or lose the business, risk or no risk.
And until there is a viable alternative to stocks, there is no reduction in buying power, since for every “buy” there is a “sell,” which means the seller must go back in to put his/her cash to work.
A BEST SIX MONTHS to own stocks – No more corrections ???
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.
The six months between November 1 and May 1, have consistently outperformed the six months between May 1 and November 1
Is this going to be another “BEST six months to own stocks ? . So far, the DJIA is ahead 8.4% since October 31, 2013 even with a 7% correction in the interim.
Over 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 year up 25.6% (1998 – 1999).
With the market off to a great start in October , it looked like a BEST six months was a no-brainer. This concerned me, since my research indicated that
prior to the January –February correction, I warned 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.
We have had one correction so far since October 31, another correction is possible, but unlikely.
Over the last 25 years, only two corrections occurred during the November 1 to May1 six months. 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.
JANUARY BAROMETER
As January goes, so goes the stock market for the year, according to the January Barometer (JB).* The 3.6% drop in the S&P 500 in January suggests a very challenging year for investors and clearly not as rewarding as 2013 when the S&P 500 rose 29% after a 5.8% rise in the preceding January.
The JB boasts an 89% accuracy rate over the years with most of its misses explained by unpredictable events, such as war and extreme bull/bear turning points.
The rationale for the JB having predictable value is that a new year is accompanied by year-end and new year portfolio adjustments and decisions based on projections for the year ahead. It is also a time when institutions receive a lot of new money that must be put to work.
So far in 2014: The S&P 500 is still down but half as much at a minus 1.6%. However since January 31, its up 2.1%. Conclusion: As a barometer, it still suggests a challenging year for both bulls and bears.
COPING WITH VOLATILITY
No one can be blamed for a little acrophobia with the S&P 500 ahead 170% in this bull market. I am sure a wave of that overcame decisions to buy or sell at lower levels a year or two ago.
We only have to turn the clock back to sizzling bull markets in the past shortly before the big crunch to appreciate preservation of capital. Investors caught in a bear market may need years to recoup their losses, assuming they get back in before the market rebounds a lot.
Yesterday, I suggested, “The risks of going “all-in” or “all-out” at any one point in time are high. Risk can be reduced by being selective and taking only a “partial” position, rather than a full one. This enables one to participate in an advance, but be less vulnerable in the event of a decline. What’s more, it tempers the urge to “do something” because the market is rising.”
While the market is defying gravity, that’s still a good idea
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THE ECONOMY:
The economic calendar is lighter this week, but hosts key reports on housing and the economy (see below)
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.”
TUESDAY:
Empire State Mfg. Svy. (8:30) Feb. index 4.48 vs 12.51 Jan..
Housing Market Ix. (10:00)
WEDNESDAY:
ICSC Goldman Store Sales (7:45)
Housing Starts (8:30)
Produce Price Ix. (8:30)
THURSDAY:
Jobless Claims (8:30)
PMI Mfg. Ix. (8;59)
Philly Fed. Ix. (10:00)
Leading Indicators (10:00)
FRIDAY:
Existing Home Sales (10:00)
Fed’s Bullard speaks (1:10 p.m.)
2014
Feb 4 DJIA 15, 372 A Rally ! How Far ?
Feb 5 DJIA 15,445 Slower Economy to Delay Further Fed Taper ?
Feb 6 DJIA 15,440 Will BIG Money Step In or Step Aside ?
Feb 7 DJIA 15,628 Easy Does It – Rally Failure Possible
Feb 10 DJIA 15,794 Critical Week for Bulls
Feb 11 DJIA 15, 801 Market Crossroads – Up ? or Down ?
Feb 12 DJIA 15,994 Bulls in Charge, but……….
Feb 13 DJIA 15,963 Suddenly, Concern for the Economy
Feb 14 DJIA 16,027 Buyers Panicking ?
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.
