A Bull Trap Is About to Be Sprung

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Stocks fell sharply on Friday, posting the second consecutive monthly loss for the Dow industrials and the S&P 500. With the Dow off 3.7% for the month and the S&P 500 down 3.1%, it was the biggest decline since January 2014 and the first time since 2012 that the major indices saw two consecutive months of losses.

Big swings in stock prices marked January as one of the most volatile months in memory for many investors. And Friday was also highly volatile, ending with a loss of 1.5% for the Dow and 1.3% for the S&P 500.

The Commerce Department reported that GDP rose at an annual rate of just 2.6% in Q4 where the consensus expectation was for a gain of 3.2%. And it was a poor comparison to Q3 GDP, which rose 5%.

Crude oil futures rose 8.3% to $48.24 a barrel, and energy stocks led, rising 0.9%. In fact, as a sector, energy was the sole gainer in the S&P 500.

The news wasn’t all bad, though. Google Inc (NASDAQ:GOOGL, NASDAQ:GOOG) rose 4.7% after reporting Q4 revenue and earnings increased 15% but fell short of expectations. Amazon.com, Inc. (NASDAQ:AMZN) jumped 13.7% after smashing Q4 earnings estimates. Visa Inc (NYSE:V) also beat Q4 estimates, up 2.8%, and announced a 4-for-1 stock split.

Consumer prices in the euro zone fell sharply in January, and the key indices reflected fear among foreign equity owners: France’s CAC 40 fell 0.6%, Germany’s DAX lost 0.4%, and Stoxx Europe 600 was down 0.5%.

Gold futures rose 1.9% to $1,278.50 an ounce, and the yield on the benchmark 10-year Treasury note fell to 1.68% from 1.75% as the global rush to the safety of U.S. bonds continued.

At Friday’s close, the Dow Jones Industrial Average fell 252 points to 17,165, the S&P 500 fell 26 points to 1,995, the Nasdaq lost 48 points at 4,635, and the Russell 2000 dropped 25 points to 1,165.

The NYSE’s primary market traded 1.2 billion shares with total volume of 4.5 billion shares. The Nasdaq crossed 2.2 billion shares. On the Big board, decliners outpaced advancers by 2.2-to-1, and on the Nasdaq, decliners led by 2.9-to-1.

For the week, the Dow fell 2.9%, the S&P 500 was off 2.8%, the Nasdaq lost 2.6%, and the Russell 2000 was down 2%.

S&P 500 Chart
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Our reliable chart of the 17-month moving average for the S&P 500 indicates that the long-term secular bull market is still with us. However, the premium of the current price over the moving average at 1,907.07 has fallen to 4.6% from 10.9% at the end of November and 9.2% at year-end.

I noted the sharp angle of advance in the Jan. 2 Daily Market Outlook, with the implication that it was unlikely that such a sharp angle could be maintained. Thus, look for a further squeeze on the premium of price over the moving average.

S&P 500 Chart
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Chart Key

The S&P 500, like all the indices, took a nasty beating on Friday. But by turning down from the double-top at 2,063, the S&P 500 is now attacking its intermediate trendline at 1,990, and if that fails to hold, the next support is the important 200-day moving average, just 15 points away at 1,975.

MACD issued a fresh sell signal last week adding more pressure to the already beleaguered bulls.

IWM Chart
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The Russell 2000 small-cap index, as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), may not appear to be in as much danger of cracking as the S&P 500. However, the trading range at $115 to $119 is a fraction away from giving way.

IWM has fallen below the 50-day moving average, which becomes resistance, and the 200-day moving average, at $114, is just 1.7 points from being penetrated. To make matters worse, MACD issued a brand-new sell signal on Friday.

Conclusion

The Dow industrials are down 4.9% from their recent record high close, and the S&P 500 is off 4.6% from its record close of 2,090.57. On the surface, this appears to be a mild pullback; however, the fall occurred in just one month and is picking up steam. Thus, the first genuine correction in over a year appears to be in the making.

Some analysts are saying, “Well it’s just like last January’s drop, and yet we had a great year.” Don’t believe it!

First, no two markets are identical. Second, sometime this year, interest rates will be raised, and the final support provided by the Federal Reserve will end. Earnings will become the only guideline, as it should be, but Q4 earnings are turning out to be much weaker than anticipated.

Since stocks are currently slightly oversold, we may get a dead cat bounce early this week. But dead cats equal a bull trap. I believe that trap is about to be sprung, and it is time to be very defensive.

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/2015/02/daily-market-outlook-bull-trap-sprung/.

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