SUMMARY:
I have been looking for a surge in stock prices since March. As recently as April 14, I headlined, “Spring Surge Still in the Cards (DJIA: 16,026),” explaining “Odds favor a spring rebound in the economy, which would trigger a sharp unexpected April/May rebound in stocks.” No rebound in the economy, I wrote – no rebound in stocks.
At the time I projected a rise in the DJIA to 16,722; it got to 16,620 intraday Friday before turning down.
The economy appears to be emerging from its long winter hibernation, so we are nearing a MOMENT OF TRUTH.
The market held up well during months when severe winter weather adversely impacted business throughout most of the country, so it stands to reason that it would celebrate a renewal of our economic recovery with a further rise in stock prices.
But reasonable isn’t a consistent characteristic of the stock market. It responds unreasonably on the upside in bull markets and unreasonably on the downside in bear markets and in the interim, as well.
MY point is this:
If the Street uses much improved economic news to bail out, then we have already seen the spring surge (3.8%) that I have been expecting.
The spring rebound projection is currently confronted by Q1 earnings and the Ukriane/Russian conflict. Selling here may be more related to these two events than to the spring rebound.
TODAY:
Expect a soft open, which is fine, since a drop in prices will give us a “read” on how confident the bulls are about values at this level. If the bears cannot get something going this week, the bulls will take over and possibly run the table.
At times, you must let the market do the talking.
With a couple down days, I am sure the “Sell in May and Go Away” pundits will be out in force. (See below).
The tech are still struggling and need a big “flush” to clear the way for an attractive buying opportunity.
Minor support is: DJIA: 16,442; S&P 500: 1,873; Nasdaq: 4,085
Breaking that, the next support is DJIA: 16,316; S&P500: 1,854; Nasdaq: 4,071
Minor resistance is: DJIA: 16,552; S&P 500: 1,885; Nasdaq: 4,133
Investor’s first read– Daily before the open
DJIA: 16,512
S&P 500: 1,881
Nasdaq Comp.: 4,123
Russell 2000: 1,128
Monday, May 5, 2014 9:10 a.m.
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Sell in May and Go Away ?? (Wednesday’s headline)
That’s a cute little jingle and the media/financial writers enjoy these things, but they can be misleading. May has offered a number of timely exits, but I don’t buy the “stay away” part, clearly not until November.
You are already seeing articles about this seasonal phenom in the press and newsletters. Essentially, it is the backend of the “Best Six Months”* to own stocks (November 1 to May 1). Obviously, the message here is of the two six month periods, May to November is the worst for stocks.
This is true, but as I have noted with the Best Six Months, a lot can happen in the interim.
This bromide can’t be taken as a “given.” Of the 26 years I studied a “top” occurred in May on 10 occasions ranging from May 1 to May 22. Two occurred in June and two in July. No meaningful top occurred in 12 of the years studied.
On far too many occasions over the last 26 years a May top was followed by a decline, but within months (well before Nov. 1) the market rallied sharply. I see it more as a trading opportunity – i.e. “Sell in May,” but be ready to buy back after a plunge.
Studies like this have to have a cut-off date, but are really intended to be accepted with an open mind, i.e. as May 1 approaches, move closer to the exit mentally, and be ready to lock in some profits and raise some cash.
THE TECHS:
It’s obvious there is a shift in market leadership out of tech stocks and into lower valuation issues. However, that shift can produce some outstanding buying opportunities in tech stocks at lower levels. The techs, et al, haven’t had a big run because they didn’t have superior growth potential or because the Street didn’t like to run them up.
They will find a level where over-valuation crosses over to under-valuation, perhaps a technical selling extreme when their prices hit the “ouch point.”
The BIG money may not let that happen, but it would be a good idea for investors to decide which ones they would be comfortable owning and at what price.
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TECHNICAL ANALYSIS OF 30 DOW STOCKS ( as of 4/25)
At key junctures, I technically analyze each of the 30 Dow industrials then convert that data back into a projected DJIA. I seek a reasonable downside and a more severe downside, as well as a projected upside potential. This is a short-term projection, assuming no significant change in news. My reasonable downside was 16,204 and more severe downside: 16,132. The current upside potential was 16,594, which was momentarily topped last Thursday.
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HOUSING:
Mortgage Bankers Association (MBA) Purchase Applications reported for the April 25 week were down 4.0% and refi’s down 7.0%. Year/year refi’s were down 21%. The sharp drop in refis (y/y) is exaggerated by the fact present refis are compared with exceptionally high numbers a year ago which coincided with exceptionally low 30-year fixed mortgage rates. When rates shot up from 3.5% to 4.5% early last year, refi’s plunged. Always look at raw numbers or a chart when given percent changes over a period of time The comparisons won’t be a dramatic in Q3 and Q4 when the year-ago numbers drop.
If new or existing home buyers think these rates are high, they should look back in time to 6%, 8% and 10% rates. The reality is rates are going up, and so are home prices. At some point, home buyers will have to buy or the market may be out of reach indefinitely.
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RUSSIA/UKRAINE
Russia’s annexation of Crimea was only the first step in President Putin’s power grab. Undoubtedly, he plans to stir additional unrest in sections of Ukraine where Russian speaking people are in great numbers. A military response by Ukraine would give him reason to invade Ukraine to protect pro-Russians and that would have an impact on global markets, which are vulnerable to begin with.
One of the factors that turns a normal market correction of 3% to 5% into a much bigger correction (5% to 12%) is new negatives that hit the market when it is about to rebound from the 5% correction. A sharp escalation in the Russia/Ukraine situation could be one of those factors.
Be prepared for a Russian incursion.
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HOUSING STOCKS –
The group got buyers again Friday. BZH, TOL and DHI especially strong.
PARTIAL LIST:
Beazer Homes (BZH) Thursday: $19.94
PulteCorp ($PHM) Thursday $18.71
Toll Brothers (TOL) Thursday $35.40
KB Homes (KBH) Thursday $16.71
DR Horton (DHI) Thursday $23.12
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THIS WEEK’s ECONOMIC REPORTS:
A much lighter schedule this week with only one housing related report – MBA Purchase applications coming early Wednesday. Today we get the PMI Services Index and ISM Non-Mfg. Index. For detailed analysis of both the U.S. and Foreign economies along with charts, go to www.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:
PMI Services Ix. (9:45):
ISM Non-Mfg. Ix. (10:00):
Global Mfg. Ix. (11:00):
TUESDAY:
ICSC Goldman Store Sales (7:45):
International Trade (8:30):
WEDNESDAY:
MBA Purchase Apps (7:00):
Productivity/Costs (8:30):
Consumer Credit (3:00)
THURSDAY:
Jobless Claims (8:30):
FRIDAY:
JOLTS –Job Openings/Labor Turnover (10:00)
Wholesale Trade(10:00):
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RECENT POSTS:
Apr 21 DJIA 16,408 A Very Important Week for Stocks
Apr 22 DJIA 16,449 Stock Market – Coiling Spring ?
Apr 23 DJIA 16,514 Today – a Test for the Bulls
Apr 24 DJIA 16,501 Surge in Stocks – Is Economy Next ?
Apr 25 DJIA 16,501 Bears Put to Test
Apr 28 DJIA 16, 361 Pivotal Week – Economy – Stock Market
Apr 29 DJIA 16,448 Market Direction – Still a Toss Up
Apr 30, DJIA 16,535 Sell in May and Go Away ??
May 1 DJIA 16,580 Money Manager Dilemma – Plunge Now
May 2 DJIA 16,558 Big Move in the Offing ?
*Stock Trader’s Almanac
A Game-On Analysis, LLC publication
George Brooks
“Investor’s first read – an edge before the open”
Investor’s first read, is a 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.
