Market Timing Brief for 1-18-2013: The Bulls Have the Ball for Now

A Market Timing Report based on the 1-18-2013 Close published Monday January 21st, 2012

UPDATE 1-24-2013 @ 2:51 AM ET: The Bulls may have just dropped the Big Tech Ball.  The QQQ’s (NASDAQ 100 Index) took an afterhours hit due to the 10% drop in Apple (AAPL).  That would erase the breakout from today and drop the index back into the prior consolidation area (sideways move) as shown in the chart (after hours move places the index back below the green line):


The breakout shown was wiped out afterhours when Apple (AAPL) fell off the tree by dropping 10%.

The first negative thing this does chart-wise is create an island reversal for Big Tech and the NASDAQ Composite Index as well, in which there is a gap up followed by a gap down.  That leaves an “island” in between the two gaps.  It’s considered a negative technical sign. 

The question is whether the damage is extended, namely whether the consolidation area is now broken to fill the post-fiscal cliff gap shown by the oval on the above chart, which may depend on the near term earnings news in the tech sector beyond Apple over the next couple of days.  Reversals following new highs are not uncommon.  Market participants figure that if a market lacks the buying power to sustain a breakout, it’s best to preserve profits.  I’d recommend having a plan to protect yours despite the strong bullish tone entering January.

UPDATE 1-22-2013 @ 1:47 pm ET:

Well, we will have the 3rd SP500 Index breakout day today if the level holds in the chart just below:


The Bulls Have the Ball

If this level holds on the close, I’ll be averaging into the market.

Now for this week’s issue….

The Republicans have helped the stock markets of the world through procrastination of the debt ceiling decision by three months.  Who says procrastination doesn’t work sometimes?  At least that is the proposal they will likely vote on in Congress this coming week, a 3 month delay.  They decided that they would look bad if they delayed yet another vote to the deadline and that they would risk roiling the markets and CEOs across the country.  As a result, the Bulls have the market timing ball, and the SP500 Index (SPX, SPY) is two days above the prior breakout point above the Autumn highs. 

Markets are all a bit stretched, so the risk of a pullback has gone up, but the risk of being out of the trade has now gone up too.  Don’t bet all your chips, but I’ll be averaging up as needed, and you can follow that on Twitter (you don’t have to have an account to read the messages by the way).  It often does take a third day to confirm a breakout and reversals after a week or two are not uncommon either, so use a stop especially on new positions and have a written plan to preserve profits.

AAII Individual Investor Sentiment this week says to me that if the sentiment spread drops to -10 to -15% or so from the current spread between Bulls and Bears of +16.6% (Bulls > Bears by that margin), we can expect a correction.  Without that sort of “jerk down” in sentiment, investor enthusiasm is at a level that could sustain a further significant rally.  Not too hot yet, and definitely far from being cold.

The VIX volatility Index says that the 2007 SP500 Index highs are within reach.  The VIX made a low not seen since June 1st, 2007. Other important lows that predated that high were on 7-20-2005 (9.88), on 12-19-2005 (10.15) and on 12-19-2006 (8.60).  So there is more potential for the VIX to fall from 12.46.  The all time SP500 Index high was 1576.09 intraday on 10-11-2007 and that will be the next target if the breakout holds.

Remember we’ll need to keep our wits about us, considering that the 2007 high represented a revisiting of the 2000 high, and that second visit was followed by a massive sell-off.  What the impetus for a big sell-off could be now we don’t know, but one possible trigger would be a steep rise in rates due to inflation in the slowly recovering economy.  A “steep rise” could even mean the Fed increasing rates back up to 2% from the near zero current rates.  Rates don’t have to rise to the punishing level of the 1980s that hit 15%.  Mortgage rates skyrocketed back then and that is something that would really hurt our economy.  If the Fed is unable to continue sustaining the low interest rates we’ve had, the housing market (HGX) will become a drag on the banks (BKX, XLF), and the banks will be a drag on the overall economy.  Other potholes?  European woes are certainly possible, because there is talk of Spain needing another bailout.

Still, the Bulls may certainly have some upside left.  The Dow Transports (DJT, IYT) are at an all time high!  That would assume very stable to falling fuel prices for years, which could happen given the US’s emerging leadership in energy production.  Oil prices are moving up, so despite the long term thesis, the transports could suffer if oil continues its climb.  Again, if the Bulls keep the ball for a few days, the 2007 market highs are the next market timing target for the SP500 Index.

Check out this week’s Sp500 chart here:

Market Timing Charts for Sunday’s Issue are Here (opens separate window so you can access all the charts at once)

One negative prognostic sign for the market is the lack of a breakout for Big Tech, namely the NASDAQ 100 Index (NDX, QQQ).  Tech had been leading before, but now that government spending is likely threatened, tech looks less promising this year.  The NASDAQ 100 stalled below a triple top this week.  The last barrier was erected by Intel’s lousy earnings report, which sent INTC down 6.48% on Friday.  Stocks that don’t do well or that project bad earnings will be high risk this earnings season.  The market is choosing to punish the individual companies that are slowing rather than taking the entire market down.  That has been the pattern, which bodes well for the SP500 Index by the way, because it could rise even with tech going sideways as it has been doing.  But the issue going forward is whether the rest of the market will weaken in time and join Big Tech by correcting or at least stalling for months.

Biotechs (BTK) confirmed my call from last week on 2013 winners by moving to a new high on Monday.   Drug stocks (DRG) are holding their last breakout as well.  Housing stocks continue to climb, despite the concerns mentioned last week.  Emerging markets are looking for their next breakout (VWO, EEM).

Gold miners look ready to move up, although I would have preferred a close on Friday above the November low in addition to rising above the December low, the latter of which did happen.  There is a nice base forming.  I wrote more about it on the new “Gold Miner” page on the main site (look for the new “Gold Miner” link on the blue bar).  I’ll do more updates in this newsletter than I do there most likely.  What I wanted to look at last week was whether the SP500 could be correcting while the gold miners rallied.  The information is here:

The Gold Miners’ Chart

Gold is caught between the down trend line, and is now above it which is positive, but is still below the 50 day moving average, which has at least temporarily held it back.

This week’s GLD Chart is at the top link above.

The idea behind gold weakness is that if the economy improves, the Fed will raise interest rates and mute the interest in gold.  Panic and worry down, gold down as real interest rates climb.  The idea behind the bullish argument is that the Fed won’t be able to control the inflation that will result from having interest rates that are still too low in a recovering economy.  Take your pick and make your investment in gold and gold stocks or not.

My bet is currently against Fed policy working smoothly as the Fed has already shown some inability to control inflation during this crisis.  Remember the food riots in India?  Food prices spiked in both 2008 and again in 2010-2011 as the chart of the agricultural commodities shows (DBA).  I say the Fed will in the end fail to ratchet down rates fast enough to avoid inflation.  Gold will spike in at least one final hurrah.  And the commodity breakout on Friday will be confirmation of this if it holds.  Commodities are a BUY now with a stop of course.

But, for now, the Fed is still in control as the new interest rate chart shows (Ten Year Treasury Note, TNX, TLT; please scroll down a bit).  Access the new chart at the top Chart Link above – “Bonus Chart of the Week.”

You can see that although the 10 year Note threatened to breakout in YIELD a short time ago, the yield trend is down once again this week.  A mild increase in rates may be tolerated, but even a 10 year rate of 3% could cause a stock market sell-off.  The market is feeling good on Fed crack, but won’t be when the crack supply is cut off.

Continue to watch to see whether individual stock earning reports follow the pattern seen so far, namely that bad earnings reports hit each individual stock very hard but more or less spare the rest of the market.

I’d also avoid big tech until there is another breakout in the NASDAQ 100 Index (NDX).  If Big Tech comes along for this rally, it would be very bullish.

Standard Disclaimer: It’s your money and your decision as to how to invest it.

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All Charts are courtesy of the Worden Brothers TC2000 Charting system, which I love and have used since April 19th, 2001 and it’s continually improving: My Charting System

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This entry was posted in Biotech, gold, gold etf, gold stocks, inflation, investment, investor sentiment, large cap stocks, Market timing, mining stocks, pharmaceutical stocks, S&P 500 Index, trading, US Stocks, volatility index and tagged , , , , , , , , , , . Bookmark the permalink.

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