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