Computer Selling = Scary Plunge = Opportunity

George Brooks |

SUMMARY:

   Monday opportunity in the first 10 minutes of trading ?

   I am getting the impression computer selling programs have been calling the shots in recent days more so than traders using their own experience and instincts, a bit like what happened in 1987 and early May 2010.

   Be aware of that possibility, we could see a harrowing, but brief plunge, a buying opportunity, if one is not too petrified to jump in.

   I have no problem with an April correction, it is what I have been expecting would set up a spring (April) rally as the economy and investor sentiments rise out of  winter’s deep freeze.

   It’s the nature of the market’s behavior, that is bothering me, it’s out of character and warrants stepping back to ask two questions. One, are computer selling programs driving  investment decisions, in which case the accuracy (and saneness) of those decisions are scary, or is something lurking out there not yet publicly known?

      Q1 earnings are beginning to pour in. That can be the good news or the bad news, for the obvious reason. Either way, it spells UNCERTAINTY. Toss in some angst about higher interest rate, the dire need for the economy to demonstrate that the recent lull was weather related and the Ukraine situation and you take uncertainty to higher levels.

   That’s more “wall of worry” stuff, but computer selling, that’s worth worrying about!

A TECHNICAL ANALYSIS OF THE 30 DOW COMPONENTS (Apr. 7)

     At key junctures, I technically analyze each of the 30 Dow  stocks seeking a reasonable near-term downside risk, a more severe risk and an upside potential for each, then use the Dow “divisor” to convert that data back into the DJIA.

    Based on my April 7 technical analysis, a reasonable risk based on present circumstances is DJIA 16,157, a more severe risk is 15,888, and the upside is 16,722.  The latter would have to come after the current slide has turned the corner.

   Yesterday the DJIA hit an intraday low of 16,153 my reasonable risk level and would only have to drop 269 points to hit my severe risk level.

   Technically, a DJIA bounce point of 15,738 (S&P 500: 1,784, Nasdaq Comp.: 3,840) seems unreasonable, but is possible.

Investor’s first readDaily before the open

DJIA:  16,170                                                                           

S&P 500: 1,833

Nasdaq  Comp.:4,050

Russell 2000: 1,127

Friday, Apri1  11, 2014      9:04 a.m.

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ANOTHER 6 percent+ CORRECTION BEFORE MAY - UNLIKELY

   One of the Stock Trader’s Almanac’s great discoveries is the fact the stock market’s performance during thesix months between November 1 and May1 is far superior to the six months between May 1 and November 1.* The Almanac  refers to it as the “Best Six Months.”

   Over of the last 25 years, the “Best Six Months” has produced 19 up-years, 3 flats and 3 downers. The best years averaged gains of 11.8 percent with the best year up 25.6 percent (1998 – 1999).

   Over the last 25 years,  there have been14 corrections ranging between 6 percent and 16 percent, but more than one correction of this size during the Best Six Months was rare.

   In 2002 there was a 6.2 percent correction in January and a 6.5 percent correction in March/April.  In 2003, there was a 7.0 percent correction in Nov. 2002/December 2002 and  a 12.9% correction in January/March of 2003.

   So far, the DJIA is ahead  5.4 percent since October 31, 2013 even with a 7 percent correction in the interim.  Another correction exceeding  6 percent is of course possible, but unlikely.

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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 percent to 5 percent into a much bigger correction (5 percent to 12 percent) is new negatives that hit the market when it is about to rebound from the 5 percent correction. A sharp escalation in the  Russia/Ukraine situation could be one of those  factors.

 SELL in MAY, and Go Away ?

   You will soon read about that 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, it is the worst for stocks. More in coming days.

   I don’t think it can be taken as a “given.” 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.

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EUROPEAN ECONOMIES:

   Manufacturing output, new orders and exports are up for the eighth consecutive month, suggesting its recovery is real, though not yet robust. Our economy has scratched and clawed its way out of  a horrendous recession without help from Europe. Obviously, a recovery there stands to accelerate the pace of our recovery here.

   The IMF released its latest global economic forecast as it meets in Washington this week. It sets global economic growth at 3.6 percent in 2014 and 3.9 percent for 2015, up from 3 percent in 2013.

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 HOUSING STOCKS – A spring rebound in the economy can hardly occur without a renewal of interest in housing stocks. While this group had a brief run last week,  Friday’s sell off stopped it in its tracks. Looks like we must get deeper into April for enough confirmation of a spring rebound from the severe winter weather to get a read on how much of an improvement we can expect.

 PARTIAL LIST: 

Beazer Homes  (BZH)   Friday: $19.65

PulteCorp ($PHM) Friday: $18.94

Toll Brothers (TOL) Friday: $35.55

KB Homes  (KBH) Friday: $16.79

DR Horton  (DHI) Friday $21.79

CONCLUSION: All five closed at their lows for the day, but so did the major market averages. This group is still a good read on the potential for the economy to rebound. Good relative strength vs. the overall market would be bullish for both the industry and economy. The latter needs strength in housing to rebound significantly.

Worth noting, the yield on the 10-year note has been dropping.

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THIS WEEK’s ECONOMIC REPORTS:

The economic calendar this  week is light with the highlight being the FOMC report.

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:

Consumer Credit (3:00): Rose sharply to $16.5 billion due to strength in non-revolving credit (car and student loans) rather than credit card use.

TUESDAY:

NFIB Small Business Ix. (7:30): Rose 2 points to 93.4 in Mar., reversing the 2.7 point drop in Feb. and reflecting optimism for future sales and inventory building.

ICSC Goldman Store Sales(7:45): Same store sales jumped 1.5 percent in the Apr. 5 week vs. the prior week. 

JOLTS-Job Openings Labor Turnover (10:00): At the end of Feb., there were 4.173 million job openings vs. 3.874 million in Jan. The “hires’ rate was 3.3 percent and “separations” rate was 3.2 percent.

WEDNESDAY:

MBA Purchase Apps (7:00): Rose 3.0 pct. in the Apr. 3 week for the third straight gain.

Wholesale Trade (10:00): February was up 0.5 pct. vs. rise of 0.8 pct. (revised up)

FOMC Minutes (2:00 p.m.):

THURSDAY:

Jobless Claims (8:30): Dropped 32,000 to 300,000 in the week ended Apr. 5. Report may have been distorted by seasonality since Easter fell on Mar. 31 last year.

Import/Export Prices (8:30): Rose 0.6 pct. in Mar./Ex. fuels, the rise was 0.3 pct.

FRIDAY:

PPI-FD – inflation report (8:30)

Consumer Sentiment(9:55):

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RECENT POSTS:

Mar 31 DJIA  16,323  CONFIDENCE Calls the Shot – April Opportunity ?

Apr 1   DJIA   16, 457 Rounding Top or Base for Big Upmove ?

Apr 2   DJIA   16,532  Market Wants to Run

Apr 3   DJIA   16,573  What the Market Really Needs Now is……

Apr 4   DJIA   16,572  New Highs Need to Hold Today

Apr 7   DJIA   16,412  Sell Off to Create Trader’s Buy

Apr 8   DJIA   16, 245 Buying Opportunity Possible Early Monday

Apr 9   DJIA   16,256  April Opportunity Looms

Apr 10 DJIA   16,437  Swing Factor: Q1 Earnings, Spring Rebound

*Stock Trader’s Almanac

A Game-On Analysis, LLC publication

George  Brooks

“Investor’s first read – an edge before the open”

Brooks007read@aol.com

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. Brooks may buy or sell stocks referred to herein.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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