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?