Market Crossroads - Up? or Down?

George Brooks |

THE BULL CASE

    The Bull case is a strong one -  a continued economic expansion with corporate earnings expected to grow in excess of 10% this year. 

    What’s more, while the S&P 500 is ahead  170% in five years, it has room to run assuming the U.S. economy and corporate profits stay the course, and international economies stabilize. As a rule, bull markets generate an increasing amount of confidence, resulting in greater risk taking, ending in a speculative orgy with low-priced, unseasoned and fundamentally over-priced stocks leading the charge.

   We haven’t seen that yet. In fact the individual investor is not yet in  the market en force.

IS THERE A PROBLEM HERE ?

   The magnitude of this year’s 7.1% plunge in the DJIA (S&P 500: 6.1%)  is not to be taken lightly.  High quality stocks such as those comprising the DJIA and ones dominating the S&P 500 should not have been be able to drop so easily.

    A softening in China’s economy, turmoil in emerging market currencies and the second Fed taper combined to trigger the sharp drop in stock prices in late January and early February.

   The plunge flushed out investors nervous about holding stocks after a 29% surge in 2013, as well as accelerated sales by 2014 profit-takers who saw the prices of stocks they planned to sell tumbling.

    After  the  market stabilized last Wednesday  and rose sharply Thursday and Friday.

   While Monday was a ho-hummer, it was more positive than negative. Twenty one of the Dow 30 industrials were upbeat for the day, nine were negative or neutral.

   TODAY:

   The market rebounded sharply Thursday and Friday and held its own Monday,which suggests it can push higher this week.

   The U.S. stock-index futures are up ahead of the open in advance of Fed Chief Yellen’s testimony before Congress today and Thursday.

   Support is DJIA 15,610 (S&P 500: 1,778.  Resistance starts at DJIA 15,924 (S&P 500: 1,812).

   Yes, it looks good.

   However, I can’t help being skeptical. I want to see more of a commitment as reflected in an increase in trading volume. Something about the ease in which blue chip stocks plunged last week that bothers me.

Investor’s first reada daily edge before the open

DJIA: 15,801

S&P 500:  1,799

Nasdaq  Comp.: 4,148

Russell 2000: 1.118

Tuesday, February 11, 2014, 2014   9:12 a.m.  

FED CHIEF YELLEN TESTIFIES THIS WEEK !

   Fed Chief Janet Yellen will testify before the U.S. House Financial Services Committee on Tuesday and before the Senate Banking Committee Thursday at 10:00 a.m. each day.  The Fed’s semi-annual monetary policy report will be released at 8:30 Tuesday.

   Her testimony is not expected to impact the market, even in face of Friday’s disappointing employment numbers. The next FOMC meeting will be held on March 18, giving the Fed plenty of time to weigh any changes for the worse in the economy.

 

TECHNICAL ANALYSIS – 30 Dow industrials  (February 4)

   Following the 326-point plunge in the DJIA last Tuesday, I technically analyzed each of the 30 Dow industrials, converting the data into  the DJIA and concluded, a reasonable near-term risk would be 15,464 and a more severe risk would be 15,124.     Monday’s close at 15,372 fell between the two risk calculations and close to two other risk calculations I track, so I  concluded a rebound was likely. The market turned up the flowing Wednesday and rallied strongly Thursday and Friday, closing above my upside targets.

February 7:

   I ran the same calculation over the weekend to arrive at new risk levels for the DJIA, as well as a near-term upside potential. A reasonable risk now is DJIA 15,610 and a more severe risk is now 15,470.  Upside potential, near-term is 16,112.

   Sixteen of the 30 Dow industrials  look like they have seen their low for this correction, 14 look like they need  a consolidation or could go lower.

  JANUARY BAROMETER

As January goes, so goes the stock market for the year, according to the January Barometer (JB).* The 3.6% drop in the S&P 500 in January suggests a very challenging year for investors and clearly not as rewarding as 2013 when the S&P 500 rose 29% after a 5.8% rise in the preceding January.

   The JB boasts an 89% accuracy rate over the years with most of its misses explained by unpredictable events, such as war and  extreme bull/bear turning points.

   The rationale for the JB  having predictable value is that a new year is accompanied by year-end and new year portfolio adjustments and decisions based on  projections for the year ahead. It is also a time when institutions receive a lot of new money that must be put to work.

DEBT CEILING DEBATE

   U.S. Secretary Jacob J. Lew has informed  Congress that the United States’ borrowing authority will not last past February 27, urging it to raise the Debt ceiling. House Republican leaders indicate they want certain concessions in exchange for  raising the debt limit. In the interim, the Treasury is resorting to “extraordinary measures” to  avoid a default. We have been here before, and default is out of the question, even brinkmanship especially in an election year.

   The issue will get ink from the press, but  it is not likely to create enough concern to impact the market.

  

……………………………………………………………………….

THE ECONOMY:

The economic calendar  is lighter this week,  but Fed chief Janet Yellen, will make two public appearances, one Tuesday before the U.S. House Financial Services Committee, the other on Thursday at 10:00 a.m. before the Senate Banking Committee (see below). 

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: No major reports

TUESDAY:

NFIB Small Business Optimism Ix (7:30)

ICSC Goldman Store Sales (7;45)

 Release of Fed’s semi-annual monetary policy (8:30)

Fed’s Plosser speaks (9:00)

JOLTS –Job Openings Labor Turnover (10:00)

Fed Chief Yellen Testifies U.S. House Financial Services Committee (10:00)

Wholesale Trade (10:00)

Fed’s Lacker speaks (8:00 p.m.

Fed’s Fisher speaks (8:10)

WEDNESDAY:

MBA Purchase Apps (8:00 )

THURSDAY:

Jobless Claims (8:30)

Retail Sales (8:30)

Fed Chief Yellen testifies before Senate Banking Committee (10:00)

Business Inventories (10:00)

FRIDAY:

Import/Export Prices 8:30)

Industrial Production (9:15)

Consumer Sentiment (9:55)

2014

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 ?

Jan 27   DJIA  15,879  Christie – Mid-Terms – Market Plunge

Jan 28   DJIA  15,837  A Very, Very Key Juncture in the Market

Jan 29   DJIA  15,928  Mini-Bear ?

Jan 30   DJIA  15,738  Risky Rallies

Jan 31   DJIA  15,848  2014 – An Ominous Start – How Far Down ?

Feb 3    DJIA  15,698  January Warning for the Market

Feb 4    DJIA 15, 372  A Rally !  How Far ?

Feb 5    DJIA  15,445  Slower Economy to Delay Further Fed Taper ?

Feb 6    DJIA  15,440 Will BIG Money Step In or Step Aside ?

Feb 7    DJIA  15,628  Easy Does It – Rally Failure Possible

Feb 10  DJIA  15,794  Critical Week for Bulls

  George  Brooks

 

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

*Stock Trader’s Almanac

sensiblesleuth@gmail.com

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.

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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