New Year’s Eve closed one of the best years for stocks in five years with a round of profit-taking that continued from Tuesday. Despite the final two days of selling, the Dow Jones Industrial Average gained 7.5% in 2014, the S&P 500 rose 11.4%, and the Nasdaq popped 13.4%.
Trading volume on Wednesday was one of the lowest of the year with just 650 million shares trading on the NYSE. Selling was primarily centered on groups that did the best during the year.
The utility sector fell 1.8% but ended the year with a gain of 24.4%. The technology sector fell 1.2%, led by Apple Inc. (APPL), which lost 1.9% but gained almost 38% for the year. The health care sector fell 1% with the iShares NASDAQ Biotechnology Index ETF (IBB) down 0.4%. Health care stocks gained 23.3% for the year.
Energy stocks continued to follow oil prices lower, falling 0.8% for the day and 10.6% for the year. WTI crude futures declined 1% on Wednesday, closing at $53.49 a barrel. They are down 46% in the past 12 months.
The benchmark 10-year Treasury note dropped to 2.17% as bonds closed higher. And gold futures fell 1.4% to $1,183.90 an ounce, down 1.5% in 2014.
Initial claims increased to 298,000 (290,000 expected), and continuing claims fell to 2.353 million (2.375 million expected). Chicago PMI came in at 58.3 (60.0 expected), and November pending home sales rose 0.8%, in line with expectations.
At the final bell of the year, the Dow Jones Industrial Average fell 160 points to 17,823, the S&P 500 lost 21 points at 2,059, the Nasdaq dropped 41 points to 4,736, and the Russell 2000 was off 8 points at 1,205.
The NYSE’s primary market traded 625 million shares with total volume of 2.5 billion shares. The Nasdaq crossed 1.5 billion shares. On the Big Board, decliners outpaced advancers by 1.8-to-1, and on the Nasdaq, decliners led by 1.3-to-1.
The long-term bull market is still intact, as can be seen from our trusty S&P 500 17-month moving average chart. The light-volume selling in the last two days of the month nipped a few tenths of a percent from the premium of the current price of the S&P 500 versus the moving average. This places the yearly close of the index at 9.2% above the moving average at 1,885.77.
Note the sharp angle of advance, which is more like the ’96-’00 bull market than the ’02-’07 bull market.
The CBOE Volatility Index (VIX) moved sharply higher in the past week with a 32% jump. This indicates that an element of fear has entered the market.
Low volume produces a high level of volatility. And an increase in the purchase of puts usually means that larger investors are hedging against a drop in stock prices.
Note the key reversal on the Russell 2000 and MACD arching down, both indications of an overbought small-cap sector.
Conclusion
In Wednesday’s Daily Market Outlook, I pointed out the similarity between the trading pattern of January 2014 and the current emerging pattern. And now we see a key reversal with a falling MACD on the Russell 2000. These are indications of a market that is overbought in the short term and due for a pullback.
Long-term investors and even many intermediate-term traders of the Russell 2000 may wish to ignore this signal since support exists just 13 points below Wednesday’s close. It is what happens after a shallow pullback that counts.
Stocks could fall sharply as we enter the new year, beginning as a round of profit-taking and evolving into the full-blown correction that we avoided in 2014.
Today through next week is crucial in establishing a short-term and longer-term stance, depending on the severity of a pullback. Support for the Russell 2000 rests in a band of trading from 1,150 (200-day moving average) and extending to the support line at 1,192. Let’s wait and see if this support holds before rushing to judgment on this year’s price targets.
On Jan. 9, 2013, I projected that the S&P 500 would rise from 1,848 at the end of 2013 to 2,200-plus. I said: “A modest P/E expansion to 18 times earnings could result in an advance to 2,214. Thus, my target for this year is 2,200-plus, an advance of about 20% from current levels.” On Dec. 29, the index hit a high of 2,094, so I wasn’t too far off.
In the Jan. 9 Daily Market Outlook, I also said: “The current bull market is a mega-bull in that it has smashed two prior bull market highs, that of 2000 at 1,553 and 2007 at 1,576, and it is only in its third phase. Most bull markets last from two to five years, but the current bull appears capable of smashing all prior records and could, in my estimation, run for several more years.”
I still believe that this bull is a mega-bull, perhaps the most powerful bovine we have seen in over 50 years. With the P/E ratio of the S&P 500 at just 19.67 times 2014 earnings and 17.25 times this year’s estimated earnings, stocks are not exceptionally overpriced.
An early correction could bring them into an even more attractive range for institutional investors and provide support for another great year.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
