Logo Background RSS

Advertisement

What’s Next For Markets?

  • Written by Syndicated Publisher No Comments Comments
    January 27, 2014

    The Dow plunged 579 points (3.5%) for the week. It was down 493 points over just the last two days. It was the market’s worst week since last June, when the Dow plunged 559 points in two days.

    That time the plunge pretty much ended that pullback. After that two-day collapse the Dow closed up 41 points the next day, and then down 139 points. That was the bottom. It was then up triple-digits for three straight days. The minor pullback was over and it was headed back up to its next record high.

    012514a

    But back then the correction was halted when Fed Chairman Bernanke rushed in with assurances the Fed was not going to taper in June after all, even though he had triggered that sell-off by hinting in May that it might. He also provided assurances that the Fed would probably not begin tapering any time soon, would not do so until it was confident the economy could handle it.

    Can we expect the Fed to rush in again with similar support at its FOMC meeting next week? And at this point would it make any difference?

    It would have been so much better had the market experienced a normal correction in its unfavorable season last year, a normal retest of the support at its 200-day m.a., and so on, a correction that would have prevented investor sentiment from becoming so euphoric, would have valuation levels at more supportive levels.

    But we have what we have. And it’s a much higher risk situation early in the year, which we might not have faced until later in the year, and would have faced with investors more aware that corrections do take place, more prepared to handle it.

    Instead, it has the market having gone for an unusual 580 trading days without even a normal 10% correction.

    And if the market decides that now is the time not just for an overdue retest of short-term support, but for it to correct the euphoric mispricing of assets that took place last year, the downside risk is significant.

    It’s no secret that the level of stock prices at year end was largely driven by investor sentiment created by confidence in the Fed, and not economic and market fundamentals.

    So we had the S&P 500 up almost 30% for the year while S&P 500 earnings are on track for a gain of only 4 or 5%. That has market valuations, as measured for instance by the Shiller CAPE P/E ratio, roughly 50% higher than its historical average.

    Here is an update of one of the charts I had in my newspaper column yesterday, which were as of Thursday’s close. The S&P 500’s first short-term support at the 50-day m.a. did not hold this time. Next potential support is at the trendline.

    012514b

    And then there is the 200-day m.a., support at which is usually retested at least once each year (but not last year).

    012514c

    However, some indexes, like the NASDAQ, have seen only minor loss of momentum. Although down sharply from its high, the NASDAQ has not declined enough to even touch its 50-day m.a.

    012514e

    We use short-term indicators only to give us an early heads-up so we won’t be surprised by short-term market actions. But obviously, serious intermediate and long-term market moves have to begin with short-term activity that morphs into something worse, so intermediate-term indicators are much more important.

    We also have to remain alert to the secular bear market that began in 2000.

    Has it already ended as some claim, since the ‘breakouts’ to levels above the 2000 and 2007 peaks have been more pronounced than they were in the secular bear market of 1965-1982?

    Or do we need to be concerned about the similar ‘megaphone’ formation?

    012514d

    It may seem predictive and useful to debate the big-picture issues; the probable effect of the Fed’s tapering, this week’s return of the economic slowdown in China, its potential credit bubble, the sizable currency declines in emerging markets, valuation levels, investor sentiment, economic reports. etc.

    But the better predictive value of longer-term moves usually lies in the intermediate-term technical indicators, which measure what the market is actually doing, rather than what such debates say it should be doing.

    However, those surrounding conditions do indicate the risk.

    To read my weekend newspaper column click here:   Was The Fed Too Hasty With Its Taper Decision-

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

Advertisement

Closed Comments are currently closed.
Play All Replay Playlist Replay Track Shuffle Playlist Hide picture