SUMMARY:
We didn’t get a big sell off at the open yesterday, and the bounce was unimpressive. Without a big push this week, the most we can expect is a two-three day pause followed by another drop.
April can still be the springboard for a strong rally though. The market must find a level that brings enough buyers off the sidelines to absorb the selling.
The Street has been confronted by a new “wall of worry” in recent weeks.
-Over-valuation of Tech stocks: in the process of being corrected.
-China: a real concern as its broadest measure of credit dropped 19% in March and money supply expanded at its slowest rate on record.
–Ukraine/Russia: see below
–Q1 earnings AND revisions for 2014 which stand to be lower due to the impact of our severe winter.
-Most important: Will the U.S. economy rebound from the adverse impact of severe winter weather ?
CONCLUSION:
This bull market has climbed a formidable wall of worry over the last five years. Many of the obstacles faced today are less severe than most of the obstacles faced in the past.
The difference now is the market is much higher today than in the past, thus more vulnerable to a correction that discounts uncertainties and negatives.
Odds favor a spring rebound in the economy, which should trigger a sharp and unexpected April/May rebound in stocks. No rebound in the economy – no rebound in the stock market.
TODAY:
A sharp sell off yesterday would have cleared the air for a turn back up in April. Yesterday’s bounce looked more like a brief consolidation that precedes another decline, which would generate enough frustration to result in that plunge that clears the air, what I was looking for yesterday.
Nevertheless, I believe the recent indiscriminant dumping of Tech stocks was generated by computer sell decisions. If their programs call for more selling, that will happen until the market has become attractive enough for institutions not relying on computers to do their thinking step in and stop the rout.
Resistance starts DJIA 16,267 (S&P 500: 1,842, Nasdaq Comp. 4,058)
Market must hold at DJIA: 16,049 (S&P 500:1,819, Nasdaq Comp. 3,088)
Investor’s first read– Daily before the open
DJIA: 16,173
S&P 500: 1,830
Nasdaq Comp.:4,022
Russell 2000: 1,115
Tuesday, Apri1 15, 2014 9:04 a.m.
A TECHNICAL ANALYSIS OF THE 30 DOW COMPONENTS
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.
Currently, 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.
Friday, the DJIA hit an intraday low of 16,015 with 127 points to go to hit my more severe risk level.
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ANOTHER 6%+ CORRECTION BEFORE MAY – UNLIKELY
One of the Stock Trader’s Almanac’s great discoveries is the fact the stock market’s performance during the six 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% with the best year up 25.6% (1998 – 1999).
Over the last 25 years, there have been 14 corrections ranging between 6% and 16%, but more than one correction of this size during the Best Six Months was rare.
In 2002 there was a 6.2% correction in January and a 6.5% correction in March/April. In 2003, there was a 7.0% correction in Nov. 2002/December 2002 and a 12.9% correction in January/March of 2003.
So far, the DJIA is ahead 5.4% since October 31, 2013 even with a 7% correction in the interim. While the rout of the Techs has driven the Nadaq Comp. down 6.8% in seven days, the DJIA and S&P 500 have dropped 3.6% and 4.3% respectively. Another correction exceeding 6% in either of these two 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% to 5% into a much bigger correction (5% to 12%) is new negatives that hit the market when it is about to rebound from the 5% 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% in 2014 and 3.9% for 2015, up from 3% 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: $18.55
PulteCorp ($PHM) Friday: $18.76
Toll Brothers (TOL) Friday: $34.91
KB Homes (KBH) Friday: $16.58
DR Horton (DHI) Friday $21.76
CONCLUSION: This group is still a good read on the potential for the economy to rebound. So far, the “read” is not encouraging. Give it another week or two until we see data from April.
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. BZH violated a technical support level and could drop to $17 – $17.25. TOL is at risk of breaking below $34.60 support. And KBH below $16.40.
Worth noting, the yield on the 10-year note has been dropping.
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THIS WEEK’s ECONOMIC REPORTS:
Four days of trading precede Good Friday, though the Leading Economic Indicators will be released Friday. While it may be too early to get a read of the housing industry’s recovery from the winter doldrums, the Housing Market Index is reported at 10 a.m. Tuesday and MBS Purchase Apps at 7 a.m. and Housing Starts at 8:30 a.m. Wednesday.
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:
Retail Sales (8:30): Up 1.1 pct. Mar. after gain of 0.7 pct. Feb (rev. up from 0.3)
Business inventories (10:00): moderate build in Feb. in spite of weather. Good vs. 0.8 pct increase in sales. Inventory/Sales ratio is 1.31 Feb..
TUESDAY:
ICSC Goldman Store Sales (7:45)
Consumer Price Ix. (8:30):
Empire State Mfg. Ix. (8:30):
Housing Mkt.Ix. (10:00)
WEDNESDAY:
MBA Purchases Apps (7:00):
Housing Starts (8:30):
Industrial Production (9:15):
Beige Book (2:00):
THURSDAY:
Jobless Claims (8:30):
Philly Fed Svy (10:00):
FRIDAY:
Market Closed, banks open
Leading economic Indicators (10:00):
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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
Apr 11 DJIA 16,170 Computer Selling = Scary Plunge = Opportunity
Apr 14 DJIA 16,026 Spring Surge Still in the Cards
*Stock Trader’s Almanac
A Game-On Analysis, LLC publication
George Brooks
“Investor’s first read – an edge before the open”
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.
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