Sidelines Are Safest Until the Whipsaws End

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On Friday, stocks were hit early, following uncertainty regarding a format for the European Central Bank’s quantitative easing plan. And after a half-hearted recovery at home, a lack of wage growth added to the pressure to sell, sending stocks lower at the close.

The Labor Department said the U.S. economy added 252,000 jobs in December, 12,000 above forecasts. The unemployment rate fell to 5.6%, the lowest since June 2008. However, average hourly wages fell 0.2% in December, while November wage growth was revised down to 0.2% from 0.4%. Falling wages are generally considered counterproductive and even deflationary.

The financial sector was hit the hardest on Friday, with a loss of 1.5% in the Financial Select Sector SPDR ETF (XLF). Retail stocks were also hard hit, and the SPDR S&P Retail ETF (XRT) fell 1.8%. Biotech suffered deep profit-taking with the iShares NASDAQ Biotechnology Index ETF (IBB) down 0.4%.

In a rare bright spot, homebuilders rallied with the iShares Dow Jones US Home Const. ETF (ITB) gaining 0.3%.

Oil dropped for its seventh straight weekly loss as Brent crude fell 1.7% to a new five-year-low of $50.11 a barrel. Gold rose 0.6% to $1,216.10 an ounce. Bond prices continued their run up with the yield on the 10-year note down to 1.97% from 2.02% on Thursday.

At Friday’s close, the Dow Jones Industrial Average was off 171 points at 17,737, the S&P 500 fell 17 points to 2,045, the Nasdaq lost 32 points at 4,704, and the Russell 2000 was down 10 points at 1,186.

The NYSE’s primary market traded 732 million shares with total volume of 3.3 billion, and the Nasdaq crossed 1.7 billion shares. On the Big Board, decliners outpaced advancers by 1.7-to-1, and on the Nasdaq, decliners led by 1.9-to-1.

For the week, the Dow fell 0.5%, the S&P 500 lost 0.7%, the Nasdaq dropped 0.5%, and the Russell 2000 closed 1.1% lower.

S&P 500 Chart
Click to Enlarge

Chart Key

The most important line on the S&P 500 chart is the support line at 2,020. That line intersects trading from early November until now and has become the bottom support for two thrusts — the first up in December and the second down last week.

The S&P 500 is bouncing in a narrow but very volatile trading zone between 2,000 and 2,060, with the mean at 2,020. The overall pressure appears to be down.

Conclusion

Whipsaws like we’ve seen since Jan. 2 are typical of intermediate- and long-term topping patterns. The more volatile, the more dangerous.

On Friday, in Jeff Saut’s “Morning Tack,” he reminded readers of the “mark-’em-up rally,” which I vividly remember decades ago, at the beginning of my career as a broker. It was a sleazy technique used by the floor specialists to manipulate markets on a very short-term basis.

Specialists would buy into sharp declines and then “engineer” a sharp rally to unload stocks that they were forced to buy as the market dropped. Then they would get short again.

Saut correctly points out that these rallies always “came out of nowhere” and were violent. Specialists could do that then, but it takes so much capital to do it now that it is not possible, unless you are a country.

The beginning of this year felt that way. Last week, I opined that the overall picture lacked the volume and breadth of a major breakout. And, as noted, whipsaws make me very uncomfortable and unwilling to buy stocks until the market settles down.

Perhaps Saut and I have been around too long and are thus suspicious by nature and experience, but his thoughts are usually solid. And when he says that he is looking for a “rough patch” for the next few months, I take that seriously. I also agree that it is the near term that is in question, and that longer term, the bull is still very much alive.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2015/01/daily-market-outlook-sidelines-safest-whipsaws-end/.

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