Bulls Are in Charge Unless These Lines Are Broken

by Sam Collins | January 6, 2014 8:03 am

On Friday, stocks had a mixed day that closed a week of typically slow holiday trading, which was exacerbated by the winter storm that hit New York City and the rest of the Northeast.

Seven S&P 500 sectors posted losses, but financials, health care and industrials closed higher and spent the entire day in the green. Bank of America (BAC[1]), Citigroup (C[2]) and JPMorgan Chase (JPM[3]) each closed with a gain.

At the close, the Dow Jones Industrial Average gained 29 points at 16,470, the S&P 500 fell 1 point to 1,831, and the Nasdaq slipped 11 points to 4,132. The primary market of the NYSE traded just 543 million shares with total volume of 2.7 billion shares, and the Nasdaq traded total volume of 1.7 billion shares. On the Big Board, there were more advancers than decliners by a ratio of 1.8-to-1, and on the Nasdaq, advancers were ahead by 1.6-to-1.

Dow Chart
Click to Enlarge

Chart Key[4]

Last week, the major indices reversed from record territory on light volume. The blue-chip Dow is representative of what occurred on the other indices.

Near term the Dow is overbought with immediate support at its 20-day moving average at 16,155 and the support line at 16,120. MACD is hooking down, telling us that we should expect a test of these support lines. But the indices are very bullish unless these near-term support lines are broken.

Conclusion: On Jan. 18, 2013[5], I said that my target for the S&P 500 was 1,589 or higher. And on April 9, 2012, on “The Kudlow Report,” Wharton finance professor Jeremy Siegel predicted that the Dow Jones Industrial Average had a 50% chance of hitting 17,000 by the end of 2013 and a 75% chance of hitting 15,000.

We both somewhat underestimated the power of the bull, but the professor was more optimistic, and thus more accurate, with his predictions.

Professor Siegel’s prediction now is that the Dow will reach 18,000 by the end of 2014, which is 9.3% higher than Friday’s close. Recently on CNBC, he said that fair value for the market is usually around a P/E ratio of 15 times in periods of high interest rates. But in the current low interest rate environment, he said that 18 to 19 times earnings is possible. The current P/E for the Dow is just under 17, so Professor Siegel’s predictions could be on target.

With traders back from the holidays, I’d like to observe how the markets react to higher volume trading before guestimating a target for the major indices for 2014. Corporate earnings will begin to flow, and U.S. manufacturing reports are due today, along with consumer credit on Wednesday, weekly jobless claims on Thursday, and the December unemployment rate on Friday.

The overall trend is that of a powerful bull market. But the big question is, how long can the sharp angle of advance on the major indices (see the17-month moving average chart of the S&P 500[6]) be sustained before a correction occurs? And will the expected “January Effect” (see Dec. 30 Daily Market Outlook[7]) arrive this year?

We should know the answer to these questions that could have an early impact on this year’s results soon.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[8].

For a list of this week’s economic reports due out, click here[9].

  1. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  2. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  3. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  4. [Image]: https://investorplace.com/wp-content/uploads/2013/12/chart-key.gif
  5. On Jan. 18, 2013: https://investorplace.com/2013/01/daily-stock-market-news-my-new-2013-target-for-the-sp-500/
  6. see the17-month moving average chart of the S&P 500: https://investorplace.com/2014/01/daily-stock-market-news-correction-everyone-expects-likely-occur/
  7. see Dec. 30 Daily Market Outlook: https://investorplace.com/2013/12/daily-stock-market-news-buy-sell-hold-heading-new-year/
  8. click here: http://www.bloomberg.com/apps/ecal?c=US
  9. click here: http://www.bloomberg.com/markets/economic-calendar/

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