I have been warning of a correction in Q1 and possibly as early as January for weeks (see below).
Two developments in recent days suggest there is a possibility that correction may not be unfolding now. One, the DJIA has been distorted by big moves in its higher priced components. Two, the Nasdaq Composite and Russell 2000 have been far stronger than the DJIA and S&P 500, suggesting a preference for greater risk-taking.
This is the opposite to a “flight to safety,” when institutions opt for stocks with less downside risk. I prefer cash in uncertain times, but money managers get paid to invest a client’s portfolio in stocks, not sit in cash.
Yesterday, 13 of the Dow’s 30 stocks contributed to 81% of the 175-point (1.02%) plunge in the DJIA, closing close to its low for the day.
On the other hand, the Nasdaq Composite dropped far less (0.67%) and closed near its high for the day, demonstrating more strength in Nasdaq stocks than the DJIA’s blue chips.
If IBM didn’t drop $6.18 Wednesday, the DJIA would have closed unchanged for the day instead of down $41 when the S&P 500, Nasdaq Composite and Russell 2000 were up for the day.
NOTE: If you want to calculate how much a stock is impacting the DJIA, divide its price change by the DJIA’s divisor now 0.1557159. It changes frequently so google: “wsj djia divisor” to get an update.
As noted Wednesday, a second Fed taper doesn’t appear to be an issue, the economic recovery is tracking positive, and international economies are stabilizing.
That leaves Q4 earnings and revisions that result for the rest of 2014, as well as the “technical” picture as swing factors for the direction of stock prices.
After a 177% bull market rise in the S&P 500 and 29% rise in 2013 alone, is this market at risk, or just pausing pursuant to another leg up ?
The DJIA and S&P Composite did not rebound yesterday, and pre-market trading indicates a follow through on the downside today.
As noted above, 81% of the loss in the DJIA was accounted for by 12 of its 30 stocks. What’s more, the Nasdaq demonstrated more strength than the DJIA and S&P 500 index.
If this is the correction I have been expecting, all four of the major market averages will plunge today, and follow through next week.
I am not wavering on my expectation for a Q1 or January correction, but I do feel it is necessary to consider the possibility that this decline is going to be short-lived primarily due to the behavior of Nasdaq and Russell.
Long-term readers don’t need this reminder, but new readers may. A modest correction of 3% - 5% can become a much uglier correction 5% to 12% if the market gets hit by new negatives at the juncture where the modest correction was poised to yield to a rebound.
That will apply to us here in a matter of days.
Again, as with yesterday, the Bulls may make a goal line stand today which suggests an intraday low of DJIA 16,091 (S&P 500:1,817).
There’s a lot of 2014 profit-taking here, profits that investors didn’t want to put into 2013. Many hedge fund managers get paid up to 20% of the profits they generate. That may account for selling in blue chips.
Investor’s first read– a daily edge before the open
S&P 500: 1,828
Nasdaq Comp. 4,218
Russell 2000: 1,172
Friday, Jan. 24, 2014 9:14 a.m.
I AM REPEATING THE FOLLOWING TO MAINTAIN AN AWARENESS OF THE POTENTIAL FOR A Q1 CORRECTION.
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 7.3% 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: $556.18) Positive
Icahn is back with rhetoric after buying more stock. AAPL up in a down market – not bad. Support $552, resistance $558.
Facebook (FB:$56.53) Positive
Got hit by a seller Wednesday after posting new 52-week high of $59.31. Damage continued Thursday, but FB closed off its low for the day. Support now $56.25, resistance now $58.
IBM (IBM:$182.73) Positive
Crushed by disappointing earnings and outlook Wednesday, but stabilized Thursday in bad market. Support is $181, resistance $185 - $186.
Pulte Homes (PHM: $19.65) Positive
Found support and a big buyer Wednesday, rebounded after early morning hit Thursday. Support now $19.40 and resistance $19.90 - $20.50.
First Solar (FSLR:$50.44) Negative
Goldman Sachs really skewered this one when it downgraded it to a sell from a buy. May be forming double bottom above $50 (maybe).A push above $54 would improve its technical pattern. Must get past resistance between $52.50 and $53 first..
Nike (NKE:$73.50) Negative –
Technical pattern getting uglier. Found enough of a buyer to close stock off its low of $72.02. Resistance lowers to $74.
Hewlett-Packard (HPQ:$29.84) Positive.
Held up well in down market. May slip to $28.60. Resistance is now $29.73
Polaris Inds. (PII:$137.45) Positive/Neutral
Introduction of new off-the-road vehicle launched PII off critical support Wednesday, but stock gave most of gain back in down market Thursday.. New support is $136.30, resistance $139.30
Amazon (AMZN: $399.87) Positive
Stalled after hitting new 52-week high $408. Support now $398, resistance $405.60
Pandora Media (P:$34.64) Positive.
Rebounded from day’s low of $33.52. Resistance $35.60.Slip to $32 - $33 area with profit taking after a big run a good possibility.
TECHNICAL ANALYSIS ALERT LIST
The following is a “Technical” alert list, stocks that have indicated an improved technical pattern. I will not follow up in detail like the stocks above. These are not buys or sells, but simply alerts that their technical pattern is improving. Normal intraday fluctuations can offer a lower price than that listed here. Positive patterns can be interrupted by corrections.
Warning: An improving technical pattern can be reversed instantly by negative commentary from the Street, broker downgrades, etc. These are “snapshots” at a given time. Good timing can target pinpoint lower prices in some cases. Most stocks are technically attractive because they sketched out a positive upbeat pattern. Some will be because they are showing signs of rebounding from a depressed condition. If after additional due diligence you decide to buy any of these stocks, always protect yourself with a stop sell. NOTE: Yesterday, I have noted price levels where I thought these stocks should encounter buying (support). But the intensity of the weakness in the overall market can take them much lower. While lower prices can make a stock more attractive, a decline can be a way station en route to yet lower prices, especially if the overall market is in a tailspin. A break below these support levels can eliminate a stock from this list.
Then too, delisting can occur if a stock becomes fully priced or its technical pattern deteriorates.
Align Technologies (ALGN:$62.67) Listed here (12/23) at $57.03. Due to a one-day reversal Tuesday with resistance now at $64, ALGN is no longer technically attractive (1/22)
Gentex (GNTX: $33.74) Listed here (12/23) at $32.64. Support: $33.60
Netease (NTES: $77.87) Listed here (12/23) at $74.51. Reversed after hitting 52-week high $84.35, but took too big a hit in Thursday’s down market, creating overhead supply between $79 and $80. No longer attractive.
Spirit Airlines (SAVE: $49.97) Listed here (12/23) at $46.06. Support: $48.70
Valeant Pharm. (VRX: $136.88)Listed here (12/23) at $112. No longer technically attractive after a big run up (1/22)
Dycom (DY:$29.35) Listed here (12/23) at $28.05. Support: $29.
Cognex (CGNX: $38.46)Listed here (12/23) at $36.09. Support $38.30.
Salex Pharm. (SLXP: $100.05) Listed here (12/23) at $87.61. Odds are it can run further, but technically unattractive due to big run up (1/22).
Natus Medical (BABY:$25.43) Listed here (12/24) at $22.80. Support: $24.60.
Sierra Wireless (SWIR:$23.54) Listed (12/24) at $22.33. Support: $22.60
RPM Int’l ($42.46) Listed here (1/13/14) at $43.09. Technical pattern weakened Friday and Tuesday. No longer attractive (1/22)
Silicom Ltd (SILC:$46.85) Listed here (1/13/14) at $46.44. No longer technically attractive after inability Tuesday to top Friday close (1/22). Wrong, by a day as company announced blowout earnings announced Thursday morning and stock soared 30%.
Bitauto (BITA: $34.98) Listed here (1/13/14) at $36.44. No longer technically attractive, though big drop in market may have distorted its pattern.
Avery (AVY: $51.24) Listed here (1/13/14) at $50.88. Support: $51.
Alexion Pharm.(ALXN:$140.75) Listed here (1/13/14) at $135.21.Break below $140 and ALXN becomes technically unattractive.
NOTE: I AM NEITHER LONG OR SHORT ANY OF THE ABOVE STOCKS
While the number of economic reports is light, there are several key ones, especially those for housing on Thursday
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.
Jobless Claims (8:30) down 1,000 to 326,000 for week ended 1/18.
PMI Mfg. Ix. (8:58) Dec. index dropped to 54.1 from 56.1 Nov.
Existing Home Sales (10:00) Dec. rose 1.0 pct. negatively impacted by a drop in available homes for sale to 4.6 million Dec. lion Nov.
FHFA House Price Ix. (10:00 Nov. increased 0.1 pct. vs. 0.5 pct gain Oct. Nov. yr over yr was 7.0 pct. vs. 8.1 pct. Oct.
Leading Indicators (10:00) Less gain in Dec. +0.1 pct. from 0.8 pct Nov.
Jan 2 DJIA 16,504 A Raging Bull, but Corrections Offer Opportunities
Jan 3 DJIA 16,441 More Downside in the Market ?
Jan 6 DJIA 16,469 Correction or New Up-Leg ?
Jan 7 DJIA 16,425 Market at Key Crossroad
Jan 9 DJIA 16,462 Bull/Bear Battle Continues – Toss Up, but…
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
“Investor’s first read – an edge before the open”
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.
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