U.S. Stock Market - Late Downside Reversal

Today was a very interesting day in the U.S. stock market. Most major indices traded near unchanged in morning dealings, but solid across-the-board gains were then made in early afternoon trade. At one point the Dow Jones Industrial Average surged +74 points to 14,149, which was only 16 points away from the all-time record closing high of 14,165 set in October 2007. I didn’t see any negative news at today’s intra-day peak (which was posted at around 2:30 PM ET) to account for the reversal, but it’s not hard to imagine that some investors may have been concerned about the ramifications of so-called sequester spending cuts that are scheduled to kick in tomorrow at the Federal budget level. Negotiations between the Obama Administration and Congress to dampen any potential negative ramifications of those cuts were a complete failure today. In the U.S. stock market, selling pressure was steady between 2:30 PM ET and the final NY close at 4:00 PM ET, with a sizeable sell program executed in the last 5 minutes of trading (just to add insult to injury). Among the major averages, only the Russell 2000 Index and the Dow Jones Transportation Average finished today in positive territory (and just barely positive for both).

Here are today’s closing marks, with changes from Wednesday’s close:

Thursday’s Changes                

Dow Jones Industrial Average                      14,054.49         - 20.88             - 0.15%          

S&P 500 Index                                                1,514.68          -   1.31             - 0.09%

NASDAQ Composite Index                             3,160.19          -   2.07             - 0.07%          

Russell 2000 Index                                           911.11           +  1.19             +0.13%                       

For your review, today’s intra-day 1-minute bar chart for the Dow Jones Industrial Average is attached here. This closely-watched market barometer peaked at 2:30 PM ET, about the same time as the intra-day peak in all major stock market averages today.

Bottom Line: At 2:30 PM ET today, with the DJIA only 16 points from its all-time high, I would have bet that a new record would be posted today in this venerable index. I remember thinking at the time that “end-of-month” last-hour dealings would probably have a positive bias as potential “window dressing” from portfolio managers might favor the buy side. Obviously, this was not the case, as sellers dominated the action in the last 90 minutes of NYSE dealings. Maybe the bulls can regroup and make another run at record highs tomorrow, but I firmly believe that tomorrow will be their last chance on this advance (which began on November 16, 2012). Unless a convincing new high is made tomorrow in the DJIA, I strongly suspect that the broader market will be in full retreat by this Monday’s close. Gold/Silver stocks were weak again today, but their time to shine will come very soon (and the gains will be well worth the pain suffered over the last two days). If most of the sequester cuts are executed, which is currently a likely scenario, then the Federal Reserve will have to compensate for this fiscal drag on the economy. Gold/silver stocks will be the obvious beneficiaries of this additional monetary accommodation.

Dow Jones Industrial Average - Today's One Minute Bar Chart

U.S. Stock Market - Impressive Advance

Today’s gains in most major U.S. stock indices were the best since January 2^nd. The Dow Jones Industrial Average surged to a 5-year recovery high and ended today convincingly above the closely-watched 14,000 level. Favorable January home sales data from the National Realtors Association set a positive tone for stocks early today. And for the second straight day, this time in testimony before Congress, Federal Reserve Chairman Ben Bernanke strongly defended the Fed’s bond-buying program and he repeated that the potential costs do not outweigh the benefits. Bernanke said that the Fed’s goal is “to keep interest rates a little bit lower to help support housing, automobiles and other parts of the economy that need support”.

Here are today’s closing marks, with changes from Tuesday’s close:

Wednesday’s Changes            

Dow Jones Industrial Average                       14,075.37        +175.24           +1.26%           

S&P 500 Index                                                1,515.99          +  19.05           +1.27%

NASDAQ Composite Index                             3,162.26          +  32.61           +1.04%           

Russell 2000 Index                                           909.92           +    9.87           +1.10%                       

For your review, the daily bar chart for the Russell 2000 Index is attached below. This index was the leader for most of the rally which began on November 16^th, 2012 and ended on February 20^th, 2013. While most major U.S. stock market averages are once again near 2013 highs, the Russell 2000 Index has yet to retrace even 50% of the losses it sustained from February 20^th to this past Monday. After today’s extraordinary single-day advance, bearish traders don’t have much to hang their hats on, but this “non-confirmation” by the Russell-2000 Index is probably significant.

Bottom Line: The rebound in U.S. stock prices from Monday’s lows can only be described as impressive. While yesterday’s advance was mostly predictable, today’s surge was unexpected by me. The Dow Jones Industrial Average is now only 90 points (0.64%) from its record closing high set on October 9^th, 2007. And the DJIA is only about 123 points away from its actual intra-day record high set on October 11^th, 2007 at 14,198.10. Both these records could easily be eclipsed tomorrow. However, the S&P 500 Index needs to advance about 4% from today’s close to eclipse its all-time high, and small-cap stocks are now starting to show weak relative strength as compared to big-cap stocks. An interesting scenario now would be for the Dow Jones Industrial Average to post a record high which would then confirm the recent record high in the Dow Jones Transportation Average, and thus get all Dow Theorists bullish at THE TOP. In the same scenario, I would like to see the Russell 2000 Index fail to make a new all-time high, which would set up a significant non-confirmation and a technical sell signal. Tomorrow and Friday are key trading days, and for the bearish case to have credibility, I think most major stock indices should be reversing to the downside by early next week at the latest. And despite today's weakness, I remain extremely bullish on Gold/Silver mining stocks.

Russell 200 Index Daily Bar Chart with Computer-based Buy & Sell Signals

U.S. Stock Market - Bernanke Bounce

Most major U.S. stock market averages rebounded today following yesterday’s thrashing, but despite bullish rhetoric from Fed Chairman Bernanke and several better than expected economic reports, today’s rebound failed to recoup even half of yesterday’s losses (on balance). For comparison purposes, Monday’s changes are included immediately below today’s changes as listed in this column.

In testimony before the Senate Banking Committee, Chairman Bernanke defended the Fed’s current accommodative monetary policy stance by saying that “In the current economic environment, the benefits of asset purchases are clear”. However, Mr. Bernanke also warned that the Fed’s stimulus actions could not completely offset the potential drag to the economy this year from current fiscal policy. Bernanke urged lawmakers to defuse the sharp automatic (sequester) spending cuts scheduled to kick in March 1^st.

In addition, Mr. Bernanke said that Fed policy was not fostering a bubble in the stock market. Despite 5-year recovery highs on most major market averages and several all-time record highs, the Chairman said “I don’t see much evidence of an equity bubble.”

Economic reports released today showed the value of U.S. homes rising in the final month of last year. The Federal Housing Finance Agency reported home prices rose 0.6% and the S&P/Case-Shiller home-price index climbed 0.2% in December. Commerce Department figures showed new-home sales rising 15.6% last month to an annual rate of 437,000, the highest mark since July 2008. And, the Conference Board said its index of consumer confidence climbed to 69.6 this month, which exceeded Wall Street analyst estimates centering on 62.3.

Here are today’s closing marks, with changes from Monday’s close:

Tuesday’s Changes                  

Dow Jones Industrial Average                      13,900.13          +115.96           +0.84%           

S&P 500 Index                                                1,496.94          +    9.09           +0.61%

NASDAQ Composite Index                             3,129.65          +  13.40           +0.43%           

Russell 2000 Index                                            900.05          +    4.21           +0.47%                       

And here are Monday’s losses (again) for comparison purposes:

                                                                                    Monday’s Changes                  

Dow Jones Industrial Average                     13,784.17         - 216.40           -1.55%           

S&P 500 Index                                                1,487.85          - 27.57             -1.85%           

NASDAQ Composite Index                             3,116.25          - 45.57             -1.44%           

Russell 2000 Index                                             895.84          - 20.32             -2.22%                       

For your review, the daily bar chart for the Silver ETF contract (symbol SLV) is attached below. As can be seen from this chart, a buy signal was triggered here today within my computer-based trading system. Gold and Silver prices were stand-out winners again today. Gold futures jumped by about $28/oz (+1.75%) and Silver futures advanced about $0.37/oz (+1.28%) as oversold technicals continued to support prices for the 3^rd straight day. Short-covering and improving sentiment also boosted prices today in this market.

Bottom Line: While modestly higher U.S. share prices are certainly possible again early tomorrow, I think sellers will soon dominate once again. Most major stock market averages are expected to soon violate Monday’s intra-day lows as the correction which began last week resumes on the downside. If we are to believe that the stock market is a “discounting mechanism”, then traders and investors should not be surprised to see positive Government economic reports even as the stock market slides south. Except to reiterate my forecast calling for at least a 10% correction on this leg, it makes little sense at this time to attempt to predict the date of the next major buying opportunity. I continue to believe that Gold/Silver mining shares will outperform the general market over the next several weeks (at least).

Silver ETF (symbol SLV) Daily Bar Chart with Computer-based Buy & Sell Signals

U.S. Stock Market - Biggest Down Day of the New Year !

The S&P 500 Index was down 1.83% today, which was fairly representative of the entire U.S. equity market. The financial press is buzzing now about potential stalemate with respect to the upcoming “sequester” spending cuts issue and the likely failure of Congress to compromise with the Obama Administration on ways to ameliorate any potential negative consequences here.

And Former Italian Prime Minister Silvio Berlusconi's strong showing in the latest Italian general elections supposedly has many pundits now thinking that much-needed financial reforms in Italy may now be on hold.

While Italy’s problems and the potential negative consequences of the sequester spending cuts are clearly important, today’s thrashing of U.S. stocks was probably already set in stone before traders and investors even walked in the doors to their offices this morning. The tide had already turned and a major stock market correction is now underway. The peaks in most major indices were posted last week, but the top in the Dow Jones Industrial Average was actually posted intra-day today. Early this morning, the DJIA traded as high as 14,082 (+82) before reversing to the downside. This closely watch barometer of the U.S. market fell 297 points from its intra-day high and finished today at its lowest level, -216 points (-1.55%) on the day.

Here are today’s closing marks, with changes from last Friday’s close:

                                                                                    Monday’s Changes                  

Dow Jones Industrial Average                      13,784.17        - 216.40             -1.55%           

S&P 500 Index                                                1,487.85          - 27.57             -1.85%           

NASDAQ Composite Index                             3,116.25          - 45.57             -1.44%           

Russell 2000 Index                                             895.84          - 20.32             -2.22%                       

For your review, the daily bar chart for the S&P 500 Index is attached below, with all buy & sell signals from my computer-based trading system reflected on this key chart (i.e. yellow dots represent buy signals and red dots represent sell signals).

Gold, Silver, and related precious metals mining stocks were standout winners today. And so were longer-term Treasury notes and bonds as “flight to quality” forces buoyed both of these asset classes. Despite recent proclamations to the contrary by legendary investors like George Soros and Jimmy Rogers, T-bonds aren’t ready to die just yet. And sentiment among traders and investors in the Gold and Silver markets was so bearish by late last week that today’s “oversold” bounce was inevitable in this beaten down asset class.

Bottom Line: A major correction is now underway in U.S. stock prices. With the exception of Gold/Silver mining shares, I don’t see any place to hide for equity investors. The Federal Reserve’s “trial balloon” from last week, where possible exit strategies from its current accommodative monetary policies were discussed, was clearly the catalyst for this latest downturn in U.S. stock prices, but the negative news for shareholders is just beginning. The first significant warning sign was probably the massive selling that was recorded by corporate insiders in January, and now we can probably expect disappointing earnings relative to analyst forecasts ahead. Ongoing dysfunction in Washington will top the list of negative factors for stocks over the next month or two at least. Only the Federal Reserve can stop the current stock market slide, but Chairman Bernanke and Company probably won’t ride to the rescue for many months or until most major market averages really get busted on the downside (-20% or so!).



S&P 500 Index Daily Bar Chart with Computer-based Buy & Sell Signals



U.S. Stock Market - 2nd Day of Selling

After an avalanche of selling yesterday, U.S. stocks were mostly lower again this morning as investors attempted to weigh the potential consequences of a major change in Federal Reserve monetary policy. On Wednesday, with its release of the minutes from the Fed’s January 30^th FOMC meeting, the Fed announced its intention to open a vigorous debate at its next FOMC meeting concerning the current phase of quantitative easing, possible exit strategies, and the ongoing risks of too much monetary accommodation.

Without significant positive news to distract investors from these latest Fed revelations, sellers mostly dominated for the second straight day. European share prices were down sharply (about -1.5% on average), which also weighed on U.S share prices today. Despite all the negativity, most major stock averages rebounded from their worst levels of the day to finish with only moderate losses. Reassuring comments from Fed Governor John Williams around 3:00 PM ET may have contributed to the last hour rebound today, but overall end-of-the-day losses were still significant.

Here are today’s closing marks, with changes from Wednesday’s close:

                                                                                    Thursday’s Changes                

Dow Jones Industrial Average                    13,880.62        - 46.92             -0.34%           

S&P 500 Index                                              1,502.42         - 18.99             -0.63%           

NASDAQ Composite Index                           3,131.49         - 32.92             -1.04%           

Russell 2000 Index                                          905.40          -   8.10             -0.89%                       

Two months from now, when most major averages are down at least 10% from here, most everyone will view yesterday’s intra-day high (set near the opening of trade) as the peak for the first half of 2013 and maybe even the peak for the entire year. In hindsight, Wall Street analysts, who are experts at looking in the rearview mirror, will say that “caution flags” were everywhere and that investors should have “raised cash” in preparation for this “obvious correction”. These same pundits will point to the dangerous level of insider selling (9 sales for every 1 buy in January), overbought technicals, too much bullish sentiment among often-wrong trading groups, consumer cutbacks in the retail sector related to higher gas prices and an uptick in payroll taxes, Wal-Mart’s leak last Friday that February sales were a “disaster” in the first two weeks, corporate earnings forecasts for 2013 that were too optimistic and back-loaded, and the first indications that the Federal Reserve may ease off the accelerator with respect to monetary policy. And I haven’t even mentioned the Fiscal drag on the U.S. economy of potential “sequester” spending cuts scheduled for March 1^st or a possible shut-down of the Federal Government later this year because of debt limit issues.

As mentioned in this column yesterday, daily and weekly chart sell signals were triggered at yesterday’s close by my computer-based trading system. These sell signals reverse the buy signals that were triggered on November 16^th (see Daily Chart of the S&P 500 Index below).

Is there any place to hide while stocks experience the correction that has been advertised here for the last three weeks? My answer is maybe yes. Since “cash” earns almost nothing right now, maybe it’s time to buy the beaten-down precious metals mining stocks. The Philadelphia Gold/Silver Miners Index posted a new 52-week low yesterday at 134.34 which is down 32% from its September 2012 peak at 196.72. Some precious metals mining stocks are down more than 50% during this period. A few brave souls dipped their toes in the water this morning with bids in this oversold group, and most gold/silver mining stocks were actually plus on the day today. One of the more interesting stories that I happen to read this afternoon was a column by Chris McKhann over at optionmonster.com. Chris reported that there were three major out-of-the-money call buys worth a total of $5.3 million in the last three minutes of yesterday’s regular trading session in three different gold mining stocks (Barrick Gold, Goldcorp, and Newmont Mining). Of course these three companies are the largest gold miners in the world, and all three trades were made by the same buyer. I mention this today because Newmont Mining just happened to post better-than-expected earnings after the close today and jumped about 3% on this news. Another miner, Pan American Silver, posted decent earnings this morning and boosted its estimates of recoverable silver reserves by 35%. This silver mining company was up 6.36% today. In the interest of full disclosure, I am long Endeavour Silver (EXK) in one of the investment accounts that I manage, but the “best of breed” in this industry is probably Goldcorp (GG) among gold miners and First Majestic Silver (AG) among silver miners. I have no positions right now in either company, but I may establish a position here at any time.

Bottom Line: While a minor rebound in U.S. stock prices is possible and even likely early tomorrow, I don’t expect buyers to maintain the upper hand for very long. The weekend financial press will be loaded with articles attempting to gauge the latest apparent turn in Federal Reserve monetary policy, and many investors will want to lighten their long positions heading into the weekend. And even though Congress returns from its winter break on Monday, I would not expect any resolution of the automatic sequester spending cuts issue anytime soon. A major correction in stocks is now underway and preservation of capital should now be the #1 priority for all investors. Cash is King (and a few small positions in Gold/Silver Mining Stocks makes sense here given valuations of between 8x and 12x forward earnings for this group in 2013).

S&P 500 Index Daily Bar Chart with Computer-based Buy & Sell Signals

U.S. Stock Market - Say It Ain't So Mr. Chairman?

U.S. stock prices experienced selling pressure almost immediately this morning at the NYSE opening bell. Futures had been up modestly pre-market, but sellers quickly gained the upper hand once the regular session began. The Dow Jones Industrial Average was an exception and managed to trade in positive territory for the first 90 minutes. However, this closely watch bell-weather then joined every other major index in negative territory by 11:00 AM ET. The modest losses that were experienced in the first half of the trading day looked like natural profit-taking after a great upside run. However, there was a fairly dramatic tone change immediately following the 2:00 PM ET release of the Federal Reserve minutes from its late January FOMC meeting. At first, these minutes appeared bullish for stocks as Fed officials voted to maintain their accommodative monetary policy by reaffirming the Fed’s commitment to buy $85 billion/month worth of Treasury and Agency Mortgage-back securities. The DJIA had been down about 40 points just before the release of the Fed minutes, but then it rebounded to near unchanged immediately following the Fed’s official press release. However, sellers soon dominated once again when the “small print” of the Fed minutes revealed that many Fed governors were openly concerned and one Fed Governor, Esther George, actually voted against the current accommodative stance on the grounds of “concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause and increase in long-term inflation expectations”. Apparently, there are now expectations of a vigorous debate at the next Federal Reserve meeting in March with respect to the monthly bond purchase program and the disposition of the Fed's now-bloated balance sheet, among other key issues. Even a hint that the Federal Reserve might be looking for an exit strategy from its 4-year record level of accommodation was enough to trigger a deluge of selling in the stock market following the release of today's Fed minutes.

In the last two hours of NYSE dealings today, most stocks fell sharply. At the end of the day, declining stocks outpaced advancing stocks by more than 3 : 1 on the NYSE and by almost 4 : 1 on the NASDAQ, And the picture was even worse if we look at volume. On the NYSE, down volume exceeded up volume by a factor of 10 : 1. And on the NASDAQ, down volume outpaced up volume by a factor of 5 : 1.

In every major index, all of February gains were lost in today’s single session. Four or five more days like today, and every major index will be down on the year!

Here are today’s closing marks, with changes from Tuesday’s close:

                                                                                    Wednesday’s Changes            

Dow Jones Industrial Average                     13,927.54         -108.13              -0.77%           

S&P 500 Index                                                1511.95           -18.99              -1.24%           

NASDAQ Composite Index                             3,164.41          -49.19              -1.53%           

Russell 2000 Index                                             913.50          -18.50              -1.98%                       

For all major stock market averages, sell signals were finally triggered within my computer-based trading system. In fact, sell signals were triggered in both the Daily Charts and the Weekly Charts, which adds to the credibility of the bearish call.

For your review, I have attached the latest daily bar chart of the Russell 2000 Index and also the latest weekly bar chart of the S&P 500 Index. All computer buy and sell signals are reflected on both charts, and the “red sell dot” is clearly shown today. As you can see from these charts, my computer algorithm isn’t always right, but its track record at major turns is impressive.

Bottom Line: It is my view that the long-awaited correction is finally underway. Computer generated sell signals were triggered today in every major stock index and also dozens of individual stocks (including Google). Uninformed bullish pundits may say that today’s selling was an “over-reaction” to the Fed’s press release. However, the Fed’s press release was probably just the catalyst that triggered sell orders that were already queued and waiting for any reasonable excuse to execute. Most major U.S. stock market indices were stretched and overbought technically, and sentiment indicators reflected too much bullishness among often-wrong investor groups. Today’s decline was inevitable, but forecasting the extent of the expected correction is now another matter. My view has been clearly indicated in this column over the last three weeks. I think this expected correction will be at least 10% (from top to bottom).

Russell 2000 Index Daily Bar Chart with Computer Buy & Sell Signals

S&P 500 Index Weekly Bar Chart with Computer Buy & Sell Signals

U.S. Stock Market - New Highs

Most major U.S. stock market averages recorded solid gains today, with some even posting all-time highs (i.e. Russell 2000 Index and the Dow Jones Transportation Average). The S&P 500 Index and the Dow Jones Industrial Average both advanced to 5-year highs. Increased M&A activity, ongoing positive corporate earnings reports, and a general feeling among investors that global recession fears may have been overblown were factors supporting share prices today.

Here are today’s closing marks, with changes from Friday’s close (Monday was a U.S. Holiday):

                                                                                    Tuesday’s Changes                  

Dow Jones Industrial Average                     14,035.67          +53.91             +0.39%           

S&P 500 Index                                                1,530.94          +11.15             +0.73%           

NASDAQ Composite Index                             3,213.59          +21.56             +0.68%           

Russell 2000 Index                                            932.00          +  8.85             +0.96%                       

For your review, I have attached the latest daily chart of the Russell 2000 Index. This index is now up 9.71% year-to-date so far in 2013. The S&P 500 Index is now up 7.34% year-to-date so far in 2013. Please note, that no sell signal has been generated by my computer-based trading system for the Russell 2000 Index or the S&P 500 Index since a buy signal was triggered in both these indexes on November 16^th. The Russell 2000 Index is up an incredible 22.06% since its intra-day low as posted on that day.

Most sectors of the market were “in sync” with the major market averages on the upside today. While homebuilders and mining shares were noteworthy exceptions here, the overall market was persistent on the upside and looked relatively strong all day.

It may be worth mentioning that if investors had been on the sidelines since the close on February 1^st, they would have missed a 1.17% advance in the S&P 500 Index, a 1.08% increase in the NASDAQ Composite, and a paltry 0.18% gain on the Dow Jones Industrial Average. Today’s market rally represented most of the total gain that was posted over the last 19 days. The key question for investors today is whether or not there will be enough upside potential from here to justify buying stocks now? Perhaps another question that might need to be addressed is the character of the next potential stock market correction? Will there be time to get out of long stock positions before sellers begin to dominate? And what are the chances of an overnight downside gap (triggered by some sort of Black Swan event)?

Bottom Line: While today’s price action in most U.S. stocks was positive, I don’t believe the potential rewards of further upside activity justify the potential risks now facing investors for a significant correction immediately ahead. While “sideline cash” earns almost nothing right now with short-term interest rates near zero, this may actually be the best option for conservative investors. More aggressive investors may find value in beaten down mining shares (especially among precious metals stocks), but investments in that sector are clearly speculative.

Russell 2000 Index Daily Bar Chart with Computer-based Buy & Sell Signals

U.S. Stock Market - Weekend Supplement

Rather than updating my usual “Week In Review” column as attached below with additional information, I have decided to issue this special supplement.

Much has been made of the record cash pouring into stock mutual funds this year. January’s $55 billion was the largest one-month inflow since February 2000. However, the rush to buy stocks has cooled a bit recently, and I think these latest numbers from Thomson Reuters’ Lipper division are noteworthy.

Mutual funds that focus on international stocks attracted more than $3 billion in the week ended February 13^th, but mutual funds that focus on U.S. stocks saw redemptions of $617.5 million, their first weekly outflow of the new year so far. Investors also pulled $1.8 billion from stock exchange-traded-funds (ETFs) last week. The biggest ETF of them all, the SPDR S&P 500 ETF (symbol SPY) saw redemptions of $2.3 billion last week, the second week in a row of outflows from this popular stock ETF.  Also noteworthy to me from this latest Lipper report was that Bond mutual funds attracted $2.9 billion of new cash last week.

Just for review, here are Friday’s closing marks, with changes from Thursday’s close, and also with changes on the week, respectively:

                                                                            Friday’s Change                  Weekly Change

Dow Jones Industrial Average   13,981.76        + 8.37       +0.06%          - 11.21          - 0.08%

S&P 500 Index                             1,519.79       -  1.59       - 0.20%           + 1.86           +0.12%

NASDAQ Composite Index          3,192.03       -  6.63       - 0.21%           -  1.84           - 0.06%

Russell 2000 Index                        923.15         -  0.61         -0.07%          + 9.48           +1.03%

Also, for your review, I have attached the latest Nasdaq-100 Weekly Bar Chart (symbol QQQ) as a prime example of a potential head & shoulders top formation. This actively traded index product has lagged most other major indices this year so far, and it is one of the few noteworthy technical "non-confirmations" of the record highs witnessed in several other major averages over the last two weeks. Of course, Apple is the largest component of this index, which may explain much of the Nasdaq-100's lagging performance.

Bottom Line: The fuel for the current advance in U.S. stock prices (i.e. cash inflows to stock funds) is exhausted and there are now even signs of deterioration in key stock market technicals. Early signs of renewed weakness in domestic economic fundamentals can be found in the leaked internal report from Wal-Mart this past Friday showing early February retail sales as a total “disaster”. U.S. equity prices are vulnerable to a meaningful correction which could start at any moment. My own view is that Republicans in Washington will refuse to compromise on so-called “sequester” spending cuts that automatically kick-in on March 1^st. While I think U.S. stock prices will roll-over before Congress returns February 25^th from its winter break, negotiations between the White House and Congress to halt or diminished the automatic spending cuts will probably be nasty and without significant progress even as the March 1^st deadline passes.

Nasdaq-100 Weekly Bar Chart - Possible Head & Shoulders Top Formation?

U.S. Stock Market - Feb 15th Week In Review

It was another mixed week for U.S. stocks. The Dow Jones Industrial Average fell for the second week in a row and the NASDAQ Composite was negative last week, but losses in both of these widely-followed indices were modest.  In fact, all major indexes posted multi-year highs at one point intra-day last week. The Russell 2000 Index of small-cap stocks was the standout performer (again) with a 1.03% gain on the week. This index is now up 8.69% year-to-date so far as compared to a gain of 6.57% for the S&P 500. The NASDAQ Composite Index is up 5.71% year-to-date. Traders, investors, and the financial media continued to focus on the steady stream of corporate earnings and domestic economic reports, European economic and political prospects, Chinese growth factors, Federal Reserve monetary policy pronouncements, and the potential ramifications of the “sequester” budget cut negotiations in Washington. None of these factors served as a meaningful catalyst for a major change in U.S. stock prices last week, but all were scrutinized carefully for any possible market moving consequences immediately ahead.

Here are Friday’s closing marks, with changes from Thursday’s close, and also with changes on the week, respectively:

                                                                          Friday’s Change                   Weekly Change

Dow Jones Industrial Average   13,981.76     + 8.37          +0.06%           - 11.21         - 0.08%

S&P 500 Index                            1,519.79     -  1.59          - 0.20%           + 1.86         + 0.12%

NASDAQ Composite Index         3,192.03     -  6.63          - 0.21%           -  1.84         - 0.06%

Russell 2000 Index                         923.15     -  0.61          - 0.07%           +  9.48        +1.03%

Friday’s news from Wal-Mart (WMT) looked interesting to me as a potential “economic” report that may have staying power beyond a single trading day. My read of this situation was that an email from Wal-Mart’s vice president of finance and logistics was leaked to the financial press with obvious negative consequences to the Company’s stock price. This VP’s comments were as follows: “In case you haven’t seen a sales report these days, February MTD (month-to-date) sales are a total disaster, …the worst start to a month I have seen in my 7 years with the company.” If we review the 1-minute intra-day trading chart of Wal-Mart on Friday, it’s not hard to see that this news hit the marketplace at around 2:03 PM ET. Wal-Mart’s stock was trading around $69.80/share at that time and within minutes of the release of this news WMT stock plunged to a low of $68.13/share (-2.39%). To Wal-Mart’s credit, its investor relations team acted quickly to settle Wall Street’s nerves by releasing the following announcement: “As with any organization, we often see internal communications that are not entirely accurate, that lack the proper context and represent individual opinions.” Wal-Mart’s stock price then rebounded to close at $69.30/share, but that was still down $1.52/share (or -2.15%) on the day. Is Wal-Mart’s news the smoking gun that turns out to be a major catalyst in moving stocks? Perhaps the American consumer is feeling the effects of higher payroll taxes this year so far? Maybe all those “back loaded” corporate earnings estimates for 2013 are too optimistic in the face of potential economic headwinds like a weakened consumer?

For your review, I have attached the daily bar chart for the Russell 2000 Small-cap Index. This particular chart also has all the buy and sell signals from my computer-based trading system. You will quickly note that there are no sell signals as yet on the current uptrend which began on November 16^th, 2012. As it turns out, there are no sell signals as yet on the daily, weekly, or monthly charts for any major index except the Dow Jones Utility Average, where a monthly chart sell signal was triggered in August 2012. My bearish view of the U.S. stock market right now continues to assume that sell signals will be triggered very soon.

I've also included the Nasdaq-100 Weekly Bar Chart (symbol QQQ) as an example of a potential head & shoulders top formation. This actively traded index product has lagged most other major indices this year so far, and it is one of the few noteworthy technical "non-confirmations" of the record highs witnessed in several major averages over the last two weeks. Of course, Apple is a major component of this index, which may explain most of the Nasdaq-100's lagging performance.

  

Bottom Line: I remain negative on the U.S. Stock Market. While buyers of every intra-day dip have been rewarded on this latest up-leg that began on November 16^th, 2012, I sense elevated levels of confidence and complacency that may be unwarranted given potential threats to stock investors on the near-term horizon. Many of the technical indicators that I follow are “overbought” and most sentiment gauges reflect extreme levels of bullishness among often-wrong investor groups. Corporate insiders are selling their own shares at a near-record pace and Wall Street’s full-year 2013 earnings estimates from analysts appear too optimistic.



Russell 2000 Daily Bar Chart with Computer-based Buy & Sell Signals



Nasdaq 100 Index (QQQ) Weekly Bar Chart - Potential Head & Shoulders Top?

U.S. Stock Market - Less Than Convincing New Highs

The DJIA, DJUA, and NY Composite were all down modestly again today for the second straight day. However, the S&P 500 Index advanced to another 5-year recovery high, and the Dow Jones Transportation Average and the Russell 2000 Index both posted all-time record closing highs today. On the NYSE, advancing stocks outpaced declining stocks just barely, 1511 vs 1507, respectively. And T-bond and T-note prices rebounded nicely, which just added to investor confusion. If the economy is doing well, then why are Treasury bonds finding a strong bid again? If the economy is rolling over, then why are stocks at record highs?

Here are today’s closing marks, with changes from Wednesday’s close:

Dow Jones Industrial Average            13,973.39        -  9.52              - 0.07%          

S&P 500 Index                                      1,521.38        + 1.05              +0.07%

NASDAQ Composite Index                   3,198.66        + 1.78              +0.06%

Russell 2000 Index                                   923.76        + 3.18              +0.35%           

Yesterday’s column was entitled “Broken Records”. While this reference was meant to describe the bullish price action in most major stock market averages, it could easily have described the message of this advisory over the last nine issues. My bearish message over this period sounded like a broken record, and today’s views are more of the same.

The Eurozone economy contracted by -0.6% in the 4^th quarter of 2012. Even Germany posted a decline in 4^th quarter GDP (at -0.6%). While it’s no big surprise to see renewed weakness in European economies, most economists expected better news this morning when this information was reported. Do we need to be concerned about European economic news? I think we always need to keep an eye on major trading partners, and this is no exception. Will this news provide headwinds for stocks? Maybe a little, but probably not enough to serve as THE catalyst for a meaningful correction in U.S. stocks. Is a so-called “stealth correction” possible? This is where sectors rotate into leadership one-by-one while others move sideways or face modest corrections before finding significant new bids again. I don’t think that will happen here. Instead, I continue to believe that a meaningful broad-based market correction is imminent and that this expected downturn will be steeper than most believe likely right now.

If timing is everything (which is probably true), then when will sellers began to dominate? There is a 3-day weekend immediately ahead, with a National Holiday on Monday. Trading could be a bit thin tomorrow as traders and investment managers get a head start on the holiday, but if the bulls aren’t in control by mid-morning, then anyone looking to lighten their long positions into the weekend might just find a dearth of bids.

A weekly chart sell signal was triggered at today's close in General Motors. GM used to be an important bellweather for the overall market. I think today's sell signal in GM was just another in a long list of warnings that there is trouble immediately ahead for stocks (see GM chart below).

Bottom Line: I would like to see a sell signal from my computer-based trading system in at least one of the major stock indexes before proclaiming the end-of-the-world, but at the same time I continue to believe the end is near and that there is almost no upside potential for U.S. stocks right here while downside risks abound. I think today’s rebound in Treasury bond prices was a bad omen for stocks as the U.S. economy slides into a “slow growth” or “no growth" phase after a 4-year recovery. My own view is that an actual recession, albeit a mild one, is on the not-to-distant horizon for the U.S; corporate profits will then disappoint, and stocks will get punished.



General Motors (GM) Weekly Bar Chart with Computer-based Buy & Sell Signals