Some Food for Thought, but Not Panic

by Sam Collins | January 17, 2014 2:56 am

Stocks opened lower on Thursday as two sectors, consumer discretionary and financials, were hit with heavy selling. But much of the early losses were overcome and the major indices closed mixed.

Best Buy (BBY[1]) fell almost 29% after reporting disappointing holiday sales. Citigroup (C[2]) lost 4.4% after missing analysts’ earnings estimates, while BlackRock (BLK[3]) gained 1.6% after it topped earnings and revenue expectations.

In economic news, U.S. unemployment benefits fell slightly and consumer prices rose to a seasonally adjusted 0.3% in December. Overall inflation numbers were in line with expectations.

At Thursday’s close, the Dow Jones Industrial Average was off 65 points at 16,417, the S&P 500 fell 2 points to 1,846, and the Nasdaq rose 4 points to 4,219. The NYSE traded 3.5 billion shares and the Nasdaq crossed 2 billion. On the Big Board, advancers outpaced decliners by 1.4-to-1, while on the Nasdaq, there were slightly more decliners.

Nasdaq Chart
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Chart Key[4]

The Nasdaq inched to another new 13-year high despite lack of follow-through by financials and some technology stocks. The Nasdaq is considered a bellwether for mid-cap stocks, and they have been favored by investors since June of last year. The channel trend of the index is not only intact but finds consistent support at its 50-day moving average — a bullish indication. Note the new MACD buy signal.

RUT Chart
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Along with the mid-cap stocks, small-caps have been favored by many money managers. Thus, this chart of the Russell 2000 reflects the heavy buying of stocks in the index for over 10 months. Like the Nasdaq, it has been supported by its 50-day moving average and has not sustained a correction (10%-12% decline) since November 2012.

Conclusion: Despite Thursday’s selling in the Dow industrials and a breakeven in the S&P 500, I am back on the bullish side for all three time frames — near, intermediate and long term — because the price action is still strong.

January’s sloppy opening appears to be the result of delayed profit-taking by those who decided to book gains in 2014 rather than 2013. Therefore, it is possible that last year’s pattern of shallow declines, amounting no more than 2% each, is being repeated. Seemingly endless piles of cash, enhanced by yet-to-be-invested pension money, still sit on the sidelines awaiting the much-delayed full 10%-12% “correction.”

And yet there is reason to be cautious. As pointed out by Sy Harding, seasonality is being ignored, i.e., the usual summer slump hasn’t occurred for two years. Also, last year saw the biggest gain for the S&P 500 since 1997 with “no challenge to the 200-day moving average for the first time in at least 15 years.” And the Consensus Inc. Bullish Sentiment Index, reported by Barron’s, was at 75% two weeks ago — a level considered “overbought” and to such an extreme level that they consider it at a level of “potential market reversals.”

Additionally, Investors Intelligence Sentiment Index is at 59.6% bulls and 14.1% bears. With a spread of 45.5, it is at the 96th percentile of its highest historical readings. Finally, the average life of the 11 bull markets since 1950 was 53 months, and the current bull market is 58 months old.

All of this is food for thought, but not panic. These numbers may cause concern, but it should only sensitize us to be more alert for genuine technical patterns that could lead to a correction. Key reversal days, bearish chart patterns, and downside crossings of moving averages are examples of tops, but none appear in today’s charts. For now, I remain cautiously bullish.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

  1. BBY:
  2. C:
  3. BLK:
  4. [Image]:
  5. click here:
  6. click here:

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