Markets continue in a state of vulnerability until an event triggers a break. The triggers last week included:
-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.
CONCLUSION:
One of the problems encountered after a cruel plunge in stock prices is it creates a formidable layer of overhead supply of stock that is likely to be sold once prices attempt to rise through it.
Since the negatives impacting stock prices now won’t be clarified near-term, a “V” rebound in stock prices is less likely than if January’s selling were related to negatives that can vanish quickly.
Whether Messrs Fink and Blankfein’s opinion that the market is overpriced is correct or not, won’t be known for months.
They can be wrong, but the bat they swing is so big, they can make it happen.
At year-end, the stock market appeared to be on the threshold for a banner year even considering the fact the S&P 500 up 28.4% last year.
Corporate earnings are presently projected to increase more than 10%, the U.S. economy continues to gain enough traction to encourage the Fed to begin tapering out of QE; the Mid-East is relatively quiet, there is less dysfunction in Washington and with the exception of an upheaval in emerging markets, economic news from abroad is favorable.
TODAY:
Last week’s nosedive was not ugly enough to qualify as the correction I have warned about, but it won’t take much more downside to get there. To date, the major market averages have declined: DJIA: -4.8%; S&P 500: -3.2%, Nasdaq Composite: -2.8%; and the Russell 2000: -3.5%.
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.
RESISTANCE(Overhead Supply) starts at DJIA 16,009 (S&P 500: 1,804).
Investor’s first read– a daily edge before the open
DJIA: 15,829
S&P 500: 1,790
Nasdaq Comp.: 4,128
Russell 2000: 1,144
Monday, Jan. 27, 2014 9:14 a.m.
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: $546.07) Positive
Icahn is back with rhetoric after buying more stock, but a plunge in the market is calling the shots right now. Further weakness in the market can take AAPL below $540.
Facebook (FB:$54.45) Positive
Got hit by a seller Wednesday after posting new 52-week high of $59.31. Damage continued Thursday and of course Friday as the market got hammered.. Resistance drops to $55 – $56. Breaking $54, FB can slide to $51 – $52.
IBM (IBM:$179.64) Neutral/Negative
Crushed by a disappointing earnings and outlook Wednesday, tried to stabilize but got hammered by Friday’s plunge in the market. Resistance drops with the stock. Next support is $176.
Pulte Homes (PHM: $18.84) Positive
Found support and a big buyer Wednesday, rebounded after early morning hit Thursday. Didn’t have a chance Friday in the market’s rout. Resistance now $19.25, support $18.00 – $18.25.
First Solar (FSLR:$48.67) Negative
Goldman Sachs really skewered this one when it downgraded it to a sell from a buy, but the decline in the overall market is adding to the injury. Stock must now find support in the low 40s. Resistance is formidable $49.70 on up.
Nike (NKE:$71.65) Negative –
Technical pattern getting uglier. Plunge in the overall market adding to its woes. Stock can break $70 even drop into the 60s. All this negative action makes a rebound more difficult.
Hewlett-Packard (HPQ:$28.49) Positive.
Plunge in the market can take HPQ to $26.
Polaris Inds. (PII:$133.00) Negative
Sliding with the market can take PII to $126. Pattern is negative but a selling climax could make it attractive on a price basis, though its pattern would not be “positive” until it developed a turning pattern.
Amazon (AMZN: $387.60) Positive/Neutral
Penetrated the lower end of its trading range at $390. Needs support now to prevent further slid. This market is taking no prisoners including big names.
Pandora Media (P:$33.65) Positive.
Has held up well, but its history is one of extreme volatility and this stock has its detractors. Could drop to $30 in a heartbeat.
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.
NOTE:
A plunge like what we saw last week can override individual stocks and crush upbeat technical patterns.
All but Natus (BABY) and Alexion Pharm. (ALXN) have been closed out because they were no longer technically attractive. At some point they will become technically attractive again, it is question of price level and the stock’s pattern.
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: $33.50) Listed here (12/23) at $32.64. Friday’s market plunge created resistance starting at $34, technical pattern damaged, now unattractive.
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 technically attractive (1/24).
Spirit Airlines (SAVE: $47.68) Listed here (12/23) at $46.06. Friday’s market plunge damaged pattern. Resistance styarts at $4p. Technically unattractive (1/24)
Valeant Pharm. (VRX: $136.88)Listed here (12/23) at $112. No longer technically attractive after a big run up (1/22)
Dycom (DY:$28.13) Listed here (12/23) at $28.05. Friday’s market plunge damaged pattern.No technically attractive (1/24)
Cognex (CGNX: $37.57)Listed here (12/23) at $36.09. Friday’s market plunge damaged pattern. No longer technically attractive (1/24)..
Salex Pharm. (SLXP: $100.05) Listed here (12/23) at $87.61. Odds are it can run further, but is technically unattractive due to big run up (1/22).
Natus Medical (BABY:$24.29) Listed here (12/24) at $22.80. Got some buying late Friday in a plunging market. Support is $24. Break below $23.40 turns pattern unattractive.
Sierra Wireless (SWIR:$23.54) Listed (12/24) at $22.33. Could rebound but Friday’ plunge damaged pattern. No longer technically attractive (1/24).
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 (1/24), though big drop in market may have distorted its pattern.
Avery (AVY: $49.13) Listed here (1/13/14) at $50.88. Could rebound but Friday’s market plunge damaged pattern. Technically unattractive. (1/24)
Alexion Pharm.(ALXN:$140.75) Listed here (1/13/14) at $135.21. Break below $140 and ALXN becomes technically unattractive (1/24)
NOTE: I AM NEITHER LONG OR 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) Proj: Dec. 450,000 unit ann.rate vs. 464,000 rate Nov.
Dallas Fed Mfg. Svy. (10:30) Proj: Jan. index 5.0 vs. 3.1 Dec.
TUESDAY:
FOMC Meeting begins Proj:
ICSC Goldman Store Sales (7:45)
Durable Goods (8:30) Proj: Dec. +1.6 pct.; Ex trans +0.7 pct.
S&P Case Shiller Home Prices (9:00) Proj: Nov. +0.8 pct.; y/y +13.7 pct.
Consumer Confidence (10:00) Proj: Jan. index 79 vs. 78.1 Dec.
Richmond Fed Mfg. Ix. Proj: Jan. index 10 vs. 13 Dec.
WEDNESDAY:
FOMC meeting announcement (2:00) no press conference.
THURSDAY:
GDP – 4th Qtr. (8:30) Proj: Q4 +3.0 pct. ann. Rate vs. 4.1 pct. (reportedly distorted)
Jobless Claims (8:30) Proj: for 1/25 week 327,000 vs. 326,000 prior week.
Pending Home Sales (10:00) Proj: Dec. minus 0.5 pct. vs. Nov. gain of 0.2 pct.
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 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
Jan 24 DJIA 16,197 Bulls – Goal Line Stand ?
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.
