Only the Short-Term Trend Has Turned Negative

by Sam Collins | January 14, 2014 1:28 am

Weekend chatter in various publications about the weakness of last week’s jobs numbers led to a triple-digit sell-off in the Dow industrials and a 1.5% decline in the Nasdaq.

A highly circulated report by Goldman Sachs (GS[1]) may have also contributed to the selling. The report said that the S&P 500 was becoming “lofty by almost any measure.” It also said that further growth in valuations would be “difficult to achieve.”

At Monday’s close, the Dow Jones Industrial Average was down 179 points at 16,258, the S&P 500 fell 23 points to 1,819, and the Nasdaq was hit hard with a 61 point sell-off to 4,113. The NYSE traded total volume of 3.6 billion shares and the Nasdaq crossed 2.3 billion. On the NYSE and Nasdaq, decliners outpaced advancers by 2.5-to-1.

SPX Chart
Click to Enlarge

Chart Key[2]

The S&P 500 suffered its worst one-day loss since Nov. 7, penetrating its first line of defense at the 20-day moving average at 1,824, but holding above the top of the support zone and the intermediate support line, both at 1,813, and the crucial 50-day moving average at 1,801.

Conclusion: Despite the shock value of a 179-point drubbing of the Dow and the worst day for the S&P 500 in two months, only the short-term trend has turned negative. Monday’s volume was again on the lighter side and breadth of 2.5-to-1 is not considered a “broad sell-off.”

Nevertheless, as pointed out in the Jan. 6 Daily Market Outlook[3], “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[4]) be sustained before a correction occurs? And will the expected ‘January Effect’ (see Dec. 30 Daily Market Outlook[5]) arrive this year?”

Jeffrey Saut of Raymond James pointed out, “The history of rallies like the one we have seen since the June 2012 ‘lows’ (40%+) is that in the next three months the equity markets are due for a 5%-7% pullback, as well as roughly a 10%-12% correction sometime over the next 12 months.”

In other words, we are overdue for a correction of 10%-12%. The bull is still in charge, but if the S&P 500 closes below the 50-day moving average at 1,801, the probability of a correction increases. Our strategy is unchanged: Buy into declines, but use our support lines as the place to take positions and use stop-loss orders to liquidate only if the support lines are violated on closing prices.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[6].

For a list of this week’s economic reports due out, click here[7].

  1. GS:
  2. [Image]:
  3. Jan. 6 Daily Market Outlook:
  4. see the17-month moving average chart of the S&P 500:
  5. see Dec. 30 Daily Market Outlook:
  6. click here:
  7. click here:

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