“Is this the correction I have been warning about,” I asked in yesterday’s pre-open post. The blue chip DJIA plunged 178 points Monday, other market averages followed its lead.
I added, “The best read can be gained from assessing any attempt of the market to rebound.”
Yesterday, the DJIA and S&P 500 rebounded impressively, but it was the Nasdaq Composite and Russell 2000 that stole the show, recouping all of Monday’s loss.
My “Technical Analysis Alert” list (see below) followed suit. Most of these stocks are listed on Nasdaq and considered aggressive growth stocks.
CONCLUSION:
Based on the ability of yesterday’s market to rebound from an abrupt and nasty plunge, and especially on the power displayed by Nasdaq and Russell stocks, there are buyers out there who will use lower prices to accumulate stocks, especially ones with greater (but not riskless) potential.
If Monday was an acceleration of a decline that started at the beginning of the year, it should not have been so easily reversed yesterday. What’s more, the rebound held its gain.
If a decline is imminent, that should not have happened.
I expected the market to continue down on Tuesday – wrong read on my part. But I did note that the “best read” would be gained by observing any attempt to rally. A rally failure (market gives back all its gain), would have been confirmation that a correction was underway. Didn’t happen. The market held its gain.
We often get our best “read” by studying how the market behaves when it runs counter to a previous trend.
The risk of a Q1 correction is still there, as explained below, but yesterday’s rebound suggests the burden of proof is now on the bears. If this is going to happen in January, they have their work cut out for them.
TODAY:
Q4 earnings will be reported in coming weeks, along with the dreaded changes in broker ratings and estimates for coming quarters. Expect sharp moves both ways.
Resistance is DJIA: 16,423 (S&P 500:1,843)
Support is DJIA: 16,280 (S&P 500: 1,825)
Investor’s first read – a daily edge before the open
DJIA: 16.373
S&P 500: 1,838
Nasdaq Comp. 4,183
Russell 2000: 1,163
Wednesday, Jan. 15, 2014 9:05 a.m.
DO NOT MISUNDERSTAND MY POSITION HERE. I am still bullish. However, for weeks I have been concerned that themarket is going to get whacked, if only for several weeks; it simply has been a question of when. I think it’s in Q1, and January is a good bet. Beyond that, it will be volatile with a number of great buying opportunities.
While 5% corrections are unnerving, they are generally over in the matter of a week or two. It’s the ones that exceed 5% that are like a sharp poke in the gut.
The greater than 5% ones are news-driven or technical. News driven start with a catalyst, an incident that is going to hang around unresolved for a while.
The technical ones reflect a momentary lapse in buying.
THE KEY TO THE SIZE OF A CORRECTION:
A modest technical correction can become a greater one, if the market is hit with bad news as it is about to turn upward. That’s when a 5 percenter becomes an 8-pecenter or worse.
STRATEGY:
One strategy for investors to employ under these conditions would be to buy a partial position in a stock they want to own, but feel it could be bought at a lower price after a market correction. If it goes higher, they are still making money. If it goes lower, they can average their cost.
Likewise, if an investor feels a position is vulnerable but believes it could still go higher, he can sell off part of the position. If it goes higher, sell the rest. If it goes lower, the higher sale averages out the shares sold at a lower price.
As simplistic as this strategy is, it is easy to overlook under pressure.
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 toMay1 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: $546.39) Positive
Needed a big buyer to reverse its 12-day slump. It got that Monday (in a bad market) and yesterday, as well. Support: $538.
Facebook (FB:$57.74) Positive
Rebounded nicely, but volume light. Support:$56.50, Resistance: $58.5
IBM (IBM:$185.92) Positive
Found support at $184. Resistance starts $188.
Pulte Homes (PHM: $19.52) Positive
Friday’s attempt to breakout reversed by big market drop. Stabilized above my support ($18.60). Once again, resistance is $20 (ugh!).
First Solar (FSLR:$51.05) Negative
No change. Goldman Sachs really skewered this one when it downgraded it to a sell from a buy. Broke support at $51 and found some buyers north of $49, but needs big buyers to turn the corner. Resistance is formidable at $52 – $53.
Nike (NKE:$75.17) Negative –
Stabilized after Monday’s crunch. Resistance $76.30. Support: $74.60
Hewlett-Packard (HPQ:$28.85) Positive.
Had a decent day in a lousy market but closed off from its intraday high.
Rebounded nicely Tuesday. Support is now$28.60.
Polaris Inds. (PII:$140.17) Positive
Stabilized above $138.Needs a follow through.
Amazon (AMZN: $397.54) Positive
Rebounded yesterday. Has a shot at crossing $400. Support now $392
Pandora Media (P:$34.13) Positive.
Stock has been responding to positive “listener” data news for 2013 year, but overall market is hurting further upside. Looks higher, but this one is highly volatile.
NEW ! NEW ! NEW ! – 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 cell in line with your tolerance for risk.
NOTE: Monday’s market plunge adversely impacted most of the technical attractiveness of the following stocks, but all except Cardtronics (CATM) stabilized or rebounded sharply. 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. These stocks were demonstrating technical strength before Monday’s slump, so they could rebound sharply. So much now depends on what the overall market does.
Align Technologies (ALGN:$60.40) Listed here (12/23) at $57.03. Support:$59
Gentex (GNTX: $33.32) Listed here (12/23) at $32.64. Support: $32.80
Netease (NTES: $79.51) Listed here (12/23) at $74.51. Reversed after hitting 52-week high $84.35. Support: $78.40
Spirit Airlines (SAVE: $47.81) Listed here (12/23) at $46.06. Support: $47
Valeant Pharm (VRX: $135.01) Listed here (12/23) at $112. Support: $134
Dycom (DY:$27.39) Listed here (12/23) at $28.05. Support: $27.30
Cognex (CGNX: $37.69) Listed here (12/23) at $36.09. Support $37.50
Salex Pharm. (SLXP: $96.58) Listed here (12/23) at $87.61. Support: $96
Natus Medical (BABY:$25.55) Listed here (12/24) at $22.80. Support: $24.50
Sierra Wireless (SWIR:$22.72) Listed (12/24) at $22.33. Support: $22
NEW ADDITIONS: (note: Not Buy recommendations, just positive technical patterns requiring additional research.
Cardtronics (CATM: $41.66) Listed here (1/13/14) at $43.88. No longer technically attractive. Down on a good market day. Has had wild swings in the past, so a rebound is possible. High risk. Discontinue coverage.
RPM Int’l ($43.11) Listed here (1/13/14) at $43.09. Support: $42.60
Silicom Ltd (SILC:$46.99) Listed here (1/13/14) at $46.44. Support: $46.50
Bitauto (BITA: $35.33) Listed here (1/13/14) at $36.44. Support: $34.60
Avery (AVY: $51.27) Listed here (1/13/14) at $50.88. Support: $51
Alexion Pharm.(ALXN: 137.66$) Listed here (1/13/14) at $135.21.Support:$135
NOTE: I AM NEITHER LONG OR SHORT ANY OF THE ABOVE STOCKS
THE ECONOMY:
While the number of economic reports is light, there are several key ones, especially those for housing.
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:
NFIB Small Business Optimism Ix. (7:30) Dec. rose 4 pts. To 93.9 vs 92.5 Nov.
ICSC Goldman Store Sales (7:45) Weather blamed for 1.0 pct. drop in chain store sales – week ended Jan 11.
Retail Sales (8:30) Dec. retail sales up 0.2 pct.
Import/Export Prices (8:30)
Business Inventories (10:00) Nov. +0.4 pct.. Stock to sales ratio: 1.29
WEDNESDAY;
Producer Price Ix. (8:30) Proj: Dec +0.4 pct. ; ex-food and energy +0.1 pct.
Empire State Mfg. Svy (8:30) Proj: Index Jan. 3.30
Beige Book (2:00)
THURSDAY:
Jobless Claims (8:30) Proj: For week 1/11/14 327,000 vs. 330,000 (1/4)
Consumer Price Ix. (8:30) Proj: Dec +0.3 pct vs. Nov. flat; ex food/engy +0.1 pct.
Philly Fed Svy (10:00) Proj: Jan. 8.7 vs, 7.0 Dec
Housing Mkt. Ix. (10:00) Proj: Index Jan. 57.5 vs. 58.0 Dec
FRIDAY:
Housing Starts (8:30) Proj: Dec 0.985 million-unit rate vs. 1.091 mil.-unit rate Nov
Industrial Production (9:15) Proj:Dec + 0.3 pct.
Consumer Sentiment (9:55) Proj: Jan index 83.5 vs. 82.5 Dec.
JOLTS (10:00) – Job Opening Labor Turnover Svy Proj: Nov. 3.930 million vs. 3.925 mil. Oct.
RECENT POSTS – 2013
Dec 26 DJIA 16,357 Year End Opportunities
Dec 27 DJIA 16,479 January 2014 Profit-Taking Will Hit Certain Stocks
Dec 30 DJIA 16,478 Be Prepared to Take Advantage of 5% January Correction
Dec 31 DJIA 16,504 Forecast: Get Ready for a Wild Ride !
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 8 DJIA 16,530 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 16,237How Ugly Can This Correction Get ?
* InvesTech Research, James Stack, Editor(www.investech.com – 406/862-7777). This is clearly one of the nation’s best. Get a sample issue and see for yourself.
George Brooks
“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.
