For the last two days I have suggested investors raise some cash to protect against a decline and to provide funds to take advantage of lower prices.
I can see a risk here down to DJIA 14,360 (S&P 500: 1,565).That assumes the market levels off here prior to a decline in the summer. Institutional buyers are so aggressively picking up stocks, a temporary top may take time to form.
Resistance starts at 15,268 (S&P 500: 1,654).
NOTE: I will be traveling next week and may not be able to post
The strength of a market can often be monitored by the intensity of a rebound following a pullback in prices. So far this year, the market has been quick to rebound reflecting money managers’ quest to buy stocks both as they run up and on brief pullbacks in prices.
If that changes, i.e. the market does not snap back quickly, it suggests a change in character and the likelihood a correction is imminent.
Watch today’s attempt to rebound for a clue.
Two things are important to know about corrections in the stock market.
One they usually come unannounced, when least expected.
Two, the extent of the decline in prices is often determined by the news that hits the market at the point a moderate correction is about to end and yield to a recovery in prices.
If new news hits the market at that juncture, the moderate correction will be extended into a bigger correction. It can be the difference between a 5% correction and an 8% to 14% correction.
As euphoria accelerates in face of rising stock prices and the belief that the surge is a one-way street (UP !), the risks of getting hurt increases.
This is really just basic stuff, but so easily forgotten, even by experienced investors.
The market’s surge this year and the absence of a meaningful correction has surprised a lot of analysts, including me. This phenom has been driven by the need to put cash to work where it can get some kind of return and “stocks” are the flavor of the month.
As the market rises relentlessly each day, so does the compulsion to load up. In time, that compulsion will revert to a buyers’ panic and a sloppy surge in prices until the bubble bursts.
We aren’t there yet and may not get there for many months.
Expect several corrections along the way. A cash reserve will temper the damage of a correction, as well as give an investor the opportunity to buy-in at lower prices.
Investor’s first read – an edge before the open
S&P 500: 1,650.47
Nasdaq Comp.: 3,465.74
Russell 2000: 988.35
Friday, May 17, 2013 (6:31a.m.)
I am releasing this post too early to include market data, futures trading and news reports shortly before the open
Apple (AAPL: $434.57)
As expected, AAPL had a buyer in the $435 area early Wednesday, but sellers were just too persistent, pounding the stock down to its next support level at $425 – $431.
Yesterday, I noted that sharply increased volume and a rebound late Wednesday afternoon suggested AAPL had attracted some buying, raising hopes the stock would stabilize in that area. I noted it would have to overcome pre-market selling, which had knocked it down 3-points. It did just that with a dramatic one-day reversal, touching a daily low of $418.90 before closing close to its high for the day at $434. Resistance now begins at $437 and I cannot rule out a test of yesterday’s low with a drop to $428, but it appears AAPL has turned the corner.
FACEBOOK (FB – $26.60)
While FB closed on the downside, I think it got some buying at the open and late in the day when selling dropped it below $26.25. Even so, I can see a further drop to $25.65 where it should reverse in a one-day reversal and begin to trace out a base.
I am not long or short Facebook.
SEQUESTER: Stay tuned, it is starting to hit. Erskin Bowles told CNBC Squawk Box recently sequester is a “stupid” way to handle deficit reduction.
At some point, the question will be raised about the sequester’s impact on the economy, notwithstanding the uncertainty it brings to persons at risk, directly and indirectly.
It is too early to expect anything to show up in the indicators, and it may never be a major issue if our economic recovery gains traction.
It is one of those potential negatives one has to consider along with other ingredients that lead to a decision to buy or sell.
Employers (government or private) may opt to furlough employees without pay, cut back on hours rather than release them to unemployment at the expense of the government. Even so, several weeks without pay has an impact on the economy.
This is one of those uncertainties that, along with a few others, can trigger a consolidation or pullback in the stock market.
We have a full docket of economic reports this week. For access to information including charts and graphics go to www.mam.econoday.com .
This week it highlights the JOLTS report, an acronym for Job Openings and Labor Turnover Survey, a Bureau of Labor Statistics (BLS) survey collected from employers each month encompassing employment, job openings, recruitment, hires and fires (separations). The data is used by the government for analyzing the state of the economy and planning. The guidance section of the FOMC is more and more indicator-based and JOLTS is one of the indicators it tracks.
It tends to lag the Employment Situation report by one month.
There were 3,844 million jobs openings at the end of March, vs. 3,899 the month before, suggesting a continuing soft job market.
Consumer Sentiment (9:55) 78.0
Leading (economic) Indicators (10:00) Proj. +0.3%
“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.
Watch Rallies for Signs of Fatigue