What to Watch for Clues to the Next Sell-off

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The last trading day of February ended with a modest loss for the major indices but the biggest monthly gain in more than two years. The Dow Jones Industrial Average rose 5.6% and the S&P 500 gained 5.5%. The Nasdaq jumped 7.1%, putting it within sight of its all-time high at over 5,000, a number not reached for almost 15 years.

The strong gains followed a January in which stocks posted the biggest losses in a year with the Dow down 3.7% and the S&P 500 off 3.1%.

On Friday, the major indices spent most of the day flatlining until profit-taking in the last hour drove stocks to close at their lows of the day.

With 485 companies in the S&P 500 reporting quarterly earnings, FactSet reported the Q4 2014 growth rate is 3.7%, above the 1.7% estimate made at the end of the quarter.

The Commerce Department said U.S. GDP rose at an annual rate of 2.2% in Q4, up from 5% in Q3, but economists had expected a growth rate of 2.6%. Chicago PMI fell to its lowest level since July 2009, indicating a contraction in business activity. Pending home sales for January rose 1.7%, below the expected 2.4%. The disappointing numbers were attributed to harsh weather conditions throughout much of the United States.

Gold rose 0.2% to $1,212.60 an ounce. Crude oil futures were up 3.3% to $49.76 a barrel. The yield on the benchmark 10-year Treasury note fell to 2.00% from 2.02% on Thursday.

At Friday’s close, the Dow Jones Industrial Average fell 82 points to 18,133, the S&P 500 lost 6 points at 2,105, the Nasdaq was off 24 points at 4,964, and the Russell 2000 fell 6 points to 1,233.

The NYSE’s primary market traded 862 million shares with total volume of 3.5 billion. The Nasdaq crossed 1.9 billion shares. On the Big Board, advancers slightly outpaced decliners, but on the Nasdaq, decliners led by 1.6-to-1.

For the week, the Dow closed unchanged, the S&P 500 fell 0.3%, the Nasdaq rose 0.2%, and the Russell 2000 eked out a gain of 0.1%.

S&P 500 Chart
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This bullish chart has kept us in the market, long term, for years. However, the S&P 500’s premium of 8.9% above its 17-month moving average is on the high side, though not as high as November’s 10.9% or December’s 9.2%. But remember, these readings led to one of the worst Januarys in recent years that resulted in a premium contraction to just 4.6% by the end of the month.

TNX Chart
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Chart Key

The chart of the benchmark 10-year Treasury note’s yield shows a steady decline. To put it another way, it shows demand for bonds since yield is inverse to price.

Despite talk of the Federal Reserve increasing rates as early as June, demand for U.S. Treasury bonds is strong, and much of that demand is from EU countries.

Dow Jones Transportation Average Chart
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Although we saw new highs in the Dow industrials, the Dow Jones Transportation Average has not made a new high. This failure to penetrate a triple-top is a “non-confirmation” under Dow Theory.

If the index fails to hold its 50-day moving average, now at 8,957, it will be set up for a decline.

Conclusion

In addition to a failure of the Dow Theory, investor sentiment, an inverse indicator, is still strongly bullish at 45.37%, according to the AAII Investor Sentiment Survey. But with continued difficulties in Greece and the possibility of Russian intervention in Ukraine, U.S. stability is still attracting capital, as shown by the T-note chart.

With stock prices rendering a P/E multiple of about 18.5 times this year’s earnings, which is just a bit high, and other indicators on shaky ground, I believe a mild round of profit-taking of no more than 5% is due.

Traders should watch the two major Dow indices for a clue to the timing, especially the transports for a break of their 50-day moving average. Long-term investors, however, should remain invested.

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/2015/03/daily-market-outlook-watch-clues-next-sell-off/.

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