U.S. Stock Market - March 29th Week In Review

After weeks of anticipation and several close calls, the S&P 500 Index finally advanced to a new record high late last week. The Dow Jones Industrial Average also posted a record high. On balance, U.S. economic news was relatively positive on the week, but the real credit for advancing stock prices can be attributed to friendly comments from most Fed officials and ongoing accommodative monetary policies from the Federal Reserve. William Dudley, president of the NY Fed, was the most friendly. In comments on Tuesday, Dudley said that the Central Bank must press ahead with its bond-buying efforts (aka QE3) because U.S. fiscal policy is now a drag on the economy in the near term.

Here are Thursday’s closing marks, with changes from Wednesday’s close, and also with changes on the week, respectively (Good Friday, 3/29, was an Exchange Holiday):

                                                                    Thursday’s Change                   Weekly Change

Dow Jones Industrial Average      14,578.54     +52.38         +0.36%        +66.51          +0.46%

S&P 500 Index                                1,569.30     +  6.35         +0.41%        +12.30          +0.79%

NASDAQ Composite Index             3,245.00      +11.00        +0.34%        +22.52          +0.67%

Russell 2000 Index                             951.55     +  1.30         +0.14%       +  5.30           +0.56%

As bad as everyone thought it was in Cyprus, it now actually appears to be much worse. Large depositors had expected to lose 20% to 30% of their cash held in the nation’s largest bank, the Bank of Cyprus, but now they are expected to lose at least 60% of their cash as the size of large deposits that could be "confiscated" now appears to have been overestimated. Reports have surfaced that many large deposits from Russian origins escaped the trap of rigid capital controls through bank-branch loopholes that were not closed fast enough to prevent legal withdrawals. At the end of the day, it’s not hard to see that ALL deposits in excess of 100,000 euros per account at both the largest and second largest banks in Cypress will be totally confiscated by the State to make good on the latest 10 billion euro “bailout” agreement with the ECB, the IMF, and European Commission (aka “the troika”).

Last Monday, March 25^th, U.S. stocks open higher on relief that a last minute Cyprus bailout package was agreed upon, but then share prices turned lower as Reuters reported that Dutch Finance Minister Jeroen Dijsselbloem said the Cyprus bailout should be viewed as a “template” for solving banking problems in the region. Dijsselbloem later released a statement clarifying his remarks (backpeddling), saying Cyprus is a “specific case with exceptional challenges” which required the measures agreed upon. However, now it appears to me that Mr. Dijsselbloem’s original comments are gaining support. It’s pretty clear to me that forced depositor “Bail-in” resolutions, as witnessed in Cyprus, will be used again by other troubled sovereign countries in Europe and elsewhere.

Every month or so, I like to look at the website of the U.S. Mint for the latest statistics on the sales of American gold and silver coins. With the threat of complete confiscation of customer bank deposits now very real, it seems to me that maybe we should all begin at least a small program of actual gold/silver coin purchases “just in case”! American Eagle Gold/Silver coins can be purchased safely and efficiently from the U.S. Mint directly. And if the latest U.S. Mint sales data is any indication, I am already way behind the trend here. For the first three months of 2013, through it’s American Eagle coin program, the U.S. Mint has sold $468 million worth of gold, which is 39% more gold than was sold in the same period last year. The U.S. Mint has also sold $427 million worth of silver coins, which is 40% more silver sold this year as compared to the first three months of 2012. Currency devaluations on a global basis through central bank monetization of sovereign debt will continue and maybe even accelerate in the weeks, months, and years ahead. Gold/Silver coins represent an excellent "store of value" option for investors. Precious metals mining stocks look like another very good option for investors now as well. Prudent diversification can be achieved here with ETFs like the GDX, GDXJ, and SIL. For your review, a copy of the latest Weekly Bar Chart for the Gold Miners ETF (symbol GDX) is attached below.

John Hussman, the head of the Hussman Funds (www.hussmanfunds.com) and one of the great market researchers of our time, may have written his best weekly column ever this weekend about the U.S. stock market. I encourage every serious investor to read it, but for anyone on a tight schedule here is the first paragraph (which definitiely gives you a fairly strong sense of Mr. Hussman's market view right now):

"Overvalued, overbought, overbullish. When in history have we seen the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) above 23, the S&P 500 over 60% above its 4-year low and 10% above its 52-week average, with investment advisory bears below 20% for at least two weeks running? Three times: the April 2010 peak, the March-May 2011 peak – both followed by corrections approaching 20% – and today. Even if one ignores the historical evidence suggesting the potential for significant bear market losses over the next couple of years, speculators should be aware that present conditions have been hostile even in the context of the recent bull market advance." John Hussman, Ph. D., from this week's column entitled "We Should Already Have Learned How This Will End" (http://hussmanfunds.com/wmc/wmc130401.htm).

Bottom Line: Just when you thought that Cyprus was “done” and that global financial markets would not be impacted by this relatively minor Mediterranean country, the news just keeps getting worse there. So-called “Forced Depositor Bail-in” procedures are clearly on the front burner of every sovereign Treasury and Central Bank in the world now. European stock markets, led by Italy and Spain, have been under pressure for most of the last three weeks. Related selling pressures will spread globally very soon. In the U.S., the old axiom “sell in May and go away” for equities will be changed to “sell in April and go away” as a major correction soon gets underway. Are there any places to hide? Cash is King and Gold/Silver mining stocks will probably outperform the broader market averages over the next three months at least.

Gold Miners ETF (symbol GDX) with Computer-generated Buy & Sell Signals

U.S. Stock Market - The New Safe Haven For Global Investors?

Traditional safe-haven investments often include gold, silver, platinum, the U.S. Dollar, and U.S. Treasury securities, but few would normally include broad measures of U.S. stocks on this list. However, after seeing “all red” on my screen early this morning for almost every global stock market index, and then watching most major U.S. stock indexes recover from steep losses to end today near unchanged, I honestly came away with the feeling that U.S. stocks may now be considered “safe havens” from a new European contagion that began in Cyprus and is now spreading to Italy, Spain, and throughout Europe.

  

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

                                                                                    Wednesday’s Closing Prices              

Dow Jones Industrial Average                        14,526.16        -  33.49            - 0.23%

S&P 500 Index                                                  1,562.85        -    0.92            - 0.06%

NASDAQ Composite Index                               3,256.52        +   4.04            +0.12%

Russell 2000 Index                                               950.24        +   0.42            +0.04%

Bottom Line: With today’s rebound from a gap-down U.S. opening serving as a launching pad, bullish stock market investors will not be denied in seeing a new record high in the S&P 500 Index tomorrow (Thursday). The $64,000 question, of course, is “when the SPX posts a new all time high tomorrow, will a rush of sideline cash extend the current advance to significantly higher levels?” I think the answer is No! I think there is no significant sideline cash ready to buy stocks at these levels, and I also think there will be negligible short-covering because there are very few shorts who could have possibly maintained any meaningful bearish position through this extraordinary advance.

U.S. Stock Market - Resilient Bull

U.S. stocks opened nicely higher this morning as Cyprus-related headlines became less threatening and investors focused instead upon friendly Federal Reserve monetary policies and relatively strong economic reports in the form of better than expected U.S. durable goods orders and favorable housing market data. The Case-Shiller index of property values in 20 cities climbed 8.1% last month, the most since June 2006. The latest Consumer Confidence report was weaker than expected, but this news was mostly ignored as bullish stock investors clearly won the day.

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

                                                                                    Tuesday’s Closing Prices                   

Dow Jones Industrial Average                        14,559.65        +111.90           +0.77%

S&P 500 Index                                                  1,563.77        +  12.08           +0.78%

NASDAQ Composite Index                               3,252.48        +  17.18           +0.53%

Russell 2000 Index                                               949.82        +    3.97           +0.42%

Today's gains in most major U.S. stock indexes speak for themselves. Despite the effective dismantling of the banking system within Cyprus and the very likely forthcoming collapse in its domestic economy, global investors seemed to take the view that “what doesn’t kill you makes you stronger”. Although from my perch in the cheap seats, it’s hard not to notice that the Italian stock market was down 0.95% today and Spain was down 1.84% today. It's just a question of time (not much time) before the end game in Italy and Spain looks very much like the end game just witnessed in Cyprus.

Bottom Line: After today’s advance, the S&P 500 Index is now less than 2 points away from its all-time record high close. Maybe tomorrow will be lucky again for the bulls and maybe the S&P 500 Index will finally push through. For bearish traders, the rally of the last 4+ months has been a monster. U.S. stocks have “climbed a wall of worry” over this time period and the rallying call has been “damn the torpedoes” and “don’t fight the Fed”. William Dudley, president of the NY Fed, said today that the Central Bank HAS to press ahead with its bond-buying efforts because Congress is going about fiscal policy the wrong way. According to Dudley, fiscal policy, which is now the “opposite” of ideal, is going to be a drag on the economy in the near term and is a primary reason the Federal Reserve should press ahead with its $85 billion-a-month asset purchase program. Of course, this speech today from Dudley is the real reason for today’s vigorous U.S. stock market advance. Minor upside from here is still possible and even likely, but I continue to believe that the next major move in U.S. equity prices will be to the downside.

U.S. Stock Market - Cyprus & The European Union

To say that it’s been an interesting last ten days in Europe is probably the understatement of the century. Today we heard that Cyprus was “successful” in its last-minute negotiations with “the troika” (European Central Bank, the European Commission and the International Monetary Fund) to preserve its 10 billion Euro bailout package and thus to remain in the European Union. The final solution involves two major steps: (1) The immediate shuttering of Cyprus’ second largest bank, Popular (Laiki) Bank, wiping out Laiki shareholders and bondholders, and confiscating all Laiki deposits greater than 100,000 Euro in any Laiki depositor accounts. I hope you will forgive my use of the word “confiscating”, but this is the truth of step #1 in the basic plan. (2) Step #2 in the “balilout” plan is to move all Laiki accounts with less than 100,000 Euro to the largest Cyprus Bank, which coincidentally is called the Bank of Cyprus. All shareholders and bondholders in the Bank of Cyprus will be 100% wiped out, and large depositors there (deposits > 100,000 euro) may suffer a “haircut” (confiscation) of as much as 30%. Since the original bailout plan from ten days ago involved Cyprus finding about 5 ½ billion Euro away from the ECB, EC, and IMF, I think we can assume that confiscation of 100% of large depositor funds in the Laiki Bank and 30% of large depositor funds in the Bank of Cyprus will just about cover this amount.

The European Central Bank had threatened to cut off emergency funds to Cypriot banks after today (March 25) unless a plan was in place that would ensure the solvency of key banks. Earlier this week, a proposal to levy an unprecedented tax on Cypriot bank deposits as part of a 10 billion euro rescue plan for the country failed to win support in parliament as popular dissent mounted, but the final solution still involved all or partial confiscation of large depositor funds in the two largest banks of Cyprus, which hold approximately 40% of the entire Island’s 68 billion deposit market (which includes 38 billion in accounts of more than 100,000 euros).

U.S. stocks opened higher this morning on “relief” that a last  minute Cyprus bailout package was agreed upon, but then share prices turned lower as Reuters reported that Dutch Finance Minister Jeroen Dijsselbloem said the Cyprus bailout should be viewed as a “template” for solving banking problems in the region. Dijsselbloem later released a statement "clarifying" his remarks (backpeddling), saying Cyprus is a “specific case with exceptional challenges” which required the measures agreed upon.

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

                                                                                    Monday’s Closing Prices                   

Dow Jones Industrial Average                        14,447.75       -  64.28            -0.44%

S&P 500 Index                                                  1,551.69       -    5.20            -0.33%

NASDAQ Composite Index                               3,235.30       -    9.70            -0.30%

Russell 2000 Index                                              945.85        -    0.42            -0.04%

Dow Jones Transportation Average                 6,134.48        -  44.78            -0.72%

While following the trials and tribulations of European finance ministers and politicians as they dealt with the Cyprus situation over the last ten days, it was not hard to envision the framework for a “final solution” when the initial tax levy on depositors was first proposed. Members of “the troika” played hardball, Cyprus overestimated its bargaining power, and Cypriot large depositors (mostly Russia) paid the price. However, what I never imagined was that any politician, banker, or finance minister would publicly endorse the terms of the final Cyprus bailout as a potential “template” for future banking problems throughout Europe. In fact, I felt confident that “everyone” would immediately reassure global financial market investors that the Cyprus situation was a one-off deal (even though depositors everywhere would probably have there doubts).

Quite frankly, I think the Cyprus deal that was agreed upon this morning will be looked upon in the not-to-distant future as the “beginning of the end” of the European Union as we know it today. Depositors in Italy and Spain are probably already thinking about moving their money to safer venues, and these same depositors will be taking direct action to accomplish exactly this goal sooner-rather-than-later.

Bottom Line: With 30 minutes remaining in today's NYSE dealings, my computer trading system was flashing potential sell signals in most major stock indexes and scores of individual issues. However, there was a minor rebound in prices into the close that resulted in no computer sell signals in any major index and a greatly diminished list of sell signals on individual issues. I follow more than 500 stocks and indexes in my system, and there were 26 actual sell signals triggered on the daily charts in 26 issues today (i.e. BAC, COP, CSX, DHI, JBHT, K, LLL, LEN, MM, NOC, TOL, WAG, WY, among others). For perspective, this is a relatively large number of signals for any single session, but I’ve seen numbers as high as 90 on major reversal days. What does it all mean? The bulls still seem to have some firepower, but the music has stopped and there are no more chairs to be found. A major stock market correction is now underway.

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

U.S. Stock Market - March 22nd Week In Review

One quick look at the weekly changes to all the major U.S. stock market indexes below and you may come away with the impression that nothing much happened last week. From the bullish camp, you may hear that most U.S. stocks showed remarkable resilience in the face of the escalating financial crisis in Cyprus and weaker than expected earnings from heavy-weight market leaders like Federal Express and Oracle. From the bearish camp, you may hear that the current financial crisis in Cyprus represents just a microcosm of the potential disasters awaiting investors across most of the Euro zone immediately ahead. The truth is probably somewhere in between.

In a moment of reflection, which may be appropriate here, I have attached the monthly bar chart of Lehman Brothers from 1996 until it went bankrupt in September 2008. In early September 2008, I remember thinking that Lehman would be just like Bear Stearns in that a Government bailout would mostly wipe out shareholders, but bondholders would be made whole and Lehman would be absorbed by Barclay’s, Bank America, or some other mammoth financial institution. It never even occurred to me that the Feds would let Lehman go down. I remember thinking that Lehman was “too big to fail” and that precedent had already been set with Bear Stearns. Of course, we all know what happened now, but the lesson of the Lehman collapse has clearly been lost to the leaders of the IMF and the Euro zone (ECB & Germany) in the current Cyprus situation. In any banking system, confidence is everything! And confidence can be very FRAGILE! And without it, depositors demand their money back, AND THEN ALL IS LOST! As much as the leaders of the Euro zone would like to believe that Cyprus is just “a pimple on an elephant’s ass” and that confiscating (large) depositor money (mostly Russian money) will just be a “one time” event exclusive to Cyprus, a dangerous precedent will be set that may very well sow the critical seed for complete disaster across Europe at a later date. If depositor funds are “taxed” (confiscated) as part of the final solution to the banking crisis in Cyprus, which now appears likely, then depositors across Europe will slowly and quietly begin to drain their accounts in troubled nations like Italy and Spain (among others) on fears that the same troubled debt "solution" may be executed there. And ALL MAY BE LOST because Cyprus wasn’t given reasonable terms on a bailout of paltry sum of 10 billion euro! What’s the definition of “all may be lost”? The European Union may never be the same again, and it may not survive at all!

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      14,512.03        +90.54        +0.63%         -  2.08              -0.01%

S&P 500 Index                                 1,556.89       +11.09         +0.72%        -  3.80              -0.24%

NASDAQ Composite Index              3,245.00       +22.40        +0.70%        -  4.06              -0.13%

Russell 2000 Index                              946.27       +  2.35        +0.25%        -  6.21              -0.65%

Bottom Line: Early next week, central bank and political rhetoric in Europe, the U.S., and elsewhere (except in Russia) will be reassuring regarding the resolution to the Cyprus situation, which will almost certainly involve a major tax levy on large depositors. And the bullish camp on U.S. stock prices will probably gain a temporary boost. However, the bearish camp will prevail in this argument, and a serious global stock market downturn will soon get underway.

Lehman Brothers Monthly Bar Chart to Sept 2008

NASDAQ Weekly Bar Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market - ECB Threats, Cyprus Sweats

With the notable exception of Japan, most global stock markets were lower today on mounting concerns about Cyprus and the potential collapse of its banking system.

The European Central Bank threatened to cut off emergency funds to Cypriot banks after March 25 unless a plan is in place that would ensure the solvency of key banks. Earlier this week, a proposal to levy an unprecedented tax on Cypriot bank deposits as part of a 10 billion euro rescue plan for the country failed to win support in parliament as popular dissent mounted.

As the standoff continued, Standard & Poor’s cut its rating on Cyprus by one level to CCC from CCC+, citing “acute problems” in the island nation’s banking industry.

However, late today Cypriot Central Bank Governor Panicos Demetriades unveiled a bank restructuring bill, saying it would avert “the risk of bank collapse,” help meet the conditions for an aid deal with European authorities and the International Monetary Fund, and allow Cypriot banks to reopen on March 26. His statement didn’t divulge details of the plan.

On the domestic front, Oracle reported weaker than expected quarterly earnings, and the Company’s stock promptly dropped 9.68%, which contributed to a 0.97% decline in the tech-heavy NASDAQ Index. However, despite the nightmare on Cyprus and relatively disappointing corporate earnings reports here in the U.S., there were still 324 new 52-week highs posted today against only 36 new 52-week lows.

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

                                                                                    Thursday’s Closing Prices                 

Dow Jones Industrial Average                        14,421.49        -  90.24            -0.62%

S&P 500 Index                                                  1,545.80        -  12.91            -0.83%

NASDAQ Composite Index                               3,222.60        -  31.59            -1.11%

Russell 2000 Index                                               943.92        -    8.03            -0.84%

Dow Jones Transportation Average            6,117.20        -100.99            -1.62%

                                   

Gold, Silver, and Treasury securities were all well bid today as flight-to-safety factors dominated trade. Precious metals mining stocks were among the few that posted solid gains today. The Philadelphia Gold/Silver Mining Index (XAU) rose 2.39% today.

A weekly chart sell signal was triggered at today's close in the Dow Jones Transporation Average by my computer trading system. Please see chart below. Red dots are sell signals; yellow dots are buy signals. Today's weekly chart sell signal in the DJTA is the first in this index since early June 2011.

Bottom Line: Even after seeing the Oracle news after yesterday’s NY close, I still thought there would be one more attempt to test the all-time record high in the S&P 500 Index, which was about 1% above yesterday’s close. However, today’s general market weakness, and the exceptional single-session loss in the Dow Jones Transportation Average (-1.62%) has to make any unbiased observer wonder if maybe the March 15^th intra-day high in the S&P 500 Index at 1,563.62 was the peak for this advance? If Europe can get its act together overnight and find 10 billion euros for Cyprus, then maybe the bulls can regain control tomorrow to mount another attempt at the S&P 500 record high? However, the tide is clearly turning now and it is starting to look like the massive “triple top” resistance in the S&P 500 Monthly Bar Chart (March 2000, October 2007, and March 2013 see chart below) will be too much to overcome on this advance. And let me be among the first to suggest that the intra-day high for the S&P 500 Index at 1,563.62 on the Ides of March was THE top for this move and that a correction of at least 10% is now underway.

Dow Jones Transportation Average Weekly Bar Chart with Computer-generated Buy & Sell Signals

S&P 500 Monthly Bar Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market - Green Light From The Fed

After two days of regularly scheduled FOMC meetings, the Federal Reserve released a statement this afternoon indicating that the U.S. economy is doing better (i.e. “moderate growth”) and labor market conditions are showing signs of improvement, but the unemployment rate remains “elevated”. The Fed observed that household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has now become more restrictive. According to the Fed, inflation is running “somewhat below the Committee’s longer-run objective” and longer-term inflation expectations remain “stable”.  And best of all worlds for stock market bulls, the Fed stated the following:

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

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

                                                                               Wednesday’s Closing Prices              

Dow Jones Industrial Average                        14,511.73        +55.91             +0.39%

S&P 500 Index                                                  1,558.71        +10.37             +0.67%

NASDAQ Composite Index                               3,254.19        +25.09             +0.78%

Russell 2000 Index                                               951.95        + 9.10              +0.97%

Dow Jones Transportation Average            6,218.19        - 21.65             - 0.35%

                                   

Quite frankly, I am not sure it gets any better for the stock market bulls than today’s post-FOMC statement from the Federal Reserve. According to the Fed, the economy is showing moderate growth, inflation is subdued, the labor market is improving, housing is on an uptick, and business investment looks solid. And despite all these plus signs, the Fed is STILL going to buy $85 billion worth of bonds per month for as far as the eye can see (to infinity and beyond). When I read the Fed’s statement just after its 2:00 PM ET release, I thought for sure most major U.S. stock market indexes would surge higher into the NY 4:00 PM ET Close. Yes, stocks advanced, but the advance was tentative, at best, and there was actually profit-taking near the final bell. All we can say for sure is that most short-sellers lost again today as advancing issues outpaced declining issues by almost 3 : 1.

Bottom Line: Despite a negative earnings report after the close today from Oracle, and earlier negative earnings surprises from Caterpillar and Federal Express, I don’t think the S&P 500 Index will just roll over and die tomorrow. In fact, I think it is much more likely that shorts get squeezed again as buyers take control following a soft predicted NYSE opening. I also think the S&P 500 will then advance towards its record intra-day high (1,576.10) at one point between now and Friday’s close. The bears may point to today’s losing day in the Dow Jones Transportation Average as tangible evidence that the end is near, and well they should. From my computer trading system, a rare preliminary monthly chart sell signal was triggered today in Fedex (FDX) and a preliminary weekly chart sell signal was triggered in UPS. These longer term signals are usually very reliable. However, I still think the all-time record high in the S&P 500 needs to be broken before a sustained downturn can begin. My next major turn date is either Friday, 3/22 or Monday, 3/25. And one of the best anniversary dates ever is coming up this weekend. March 24^th was the day the S&P 500 peaked in the year 2,000. The 30-month bear market that followed cut the S&P 500  in half, while the NASDAQ Composite lost an incredible 78% as the dot com bubble burst. Nothing as dramatic is predicted here for the next bear market, but the bears will soon have their time (if they have any money left).

Federal Express (FDX) Monthly Bar Chart with Computer-generated Buy & Sell Signals

UPS Weekly Bar Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market - Cyprus Still In The News

Most of the global financial markets remained in limbo today as Cyprus attempted to deal with its deteriorating financial situation. At around 3:15 PM ET, news was finally released that the Cyprus parliament rejected a controversial bank deposit levy that was a precondition for a bailout of 10 billion euros from international lenders. Most major U.S. stock indices were slightly lower at that time, but then rallied temporarily. However, with no apparent credible alternatives to resolve the crisis in Cyprus, the rally stalled. “Flight-to-quality” options like gold and Treasury securities were still well bid at the close of NY dealings today, but the last chapter has yet to be written on the current Cyprus dilemma or European woes in general.

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

                                                                                 Tuesday’s Closing Prices                   

Dow Jones Industrial Average                    14,455.82        + 3.76              +0.03%

S&P 500 Index                                              1,548.34        -  3.76              - 0.24%

NASDAQ Composite Index                           3,229.10        -  8.50              - 0.26%

Russell 2000 Index                                           942.85        -  4.35              - 0.46%

Gold                                                                1,611.70       + 7.10              +0.54%

        

Bottom Line: Despite my overall bearish view of the U.S. stock market, I thought that today would be a stronger day than it actually was. While the Dow Jones Industrial Average managed to post a winning day, most other major indexes were down for the third straight day. Is the Cyprus situation relevant (Cyprus is just 0.2% of Europe’s total economy)? Can the Eurozone “kick this can” down the road without setting a key precedent for potentially dealing with nightmares like Greece, Italy and Spain at some later date? For the moment, the answer is yes; the Eurozone and all its bankers will find a way to kick the Cyprus can down the road. Cyprus has had its 15 minutes in the limelight of global financial disasters. As mentioned in previous columns recently, I think this week’s FOMC meeting is the most important event on the calendar.  The Fed’s post-FOMC policy announcement is now scheduled for Wednesday, March 20^th at 2:00 PM ET, and this short statement could easily provide the fireworks for an immediate expansion in volatility and maybe even valuable clues to the next major move in stocks.

U.S. Stock Market - Black Swans From Cyprus

Global financial market investors are walking on eggshells right now awaiting final results from a parliamentary resolution currently being discussed in Cyprus that would actually impose an unprecedented levy on bank accounts as part of a 10 billion euro bailout package from the European Union.

Under a deal struck in Brussels on Saturday, bank deposits under $100,000 in Cyprus would face a levy of 6.7 percent, ripping up the protection savers thought they enjoyed on insured deposits up to that limit, while those deposits above $100,000 would be hit by a 9.9 percent levy. However, everything is on hold right now in Cyprus, with most of its citizens outraged and many participating in mass protests. Banks there are closed per Government directive and most ATM machines are without money.

I am not sure how this will all play out, but the ramifications of such a blatant attempt at “Government confiscation” of depositors’ assets could be “earth shattering” in terms of potential disruptions to global financial markets.

Late last night (Sunday), there was heavy selling of equities across almost every foreign market, with equal-and-opposite flight-to-safety buying of Gold and Treasury securities. Today, cooler heads seemed to prevail, but uncertainties relating to the Cyprus bailout continued to haunt equity investors to some extent.

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

                                                                                    Monday’s Closing Prices                 

Dow Jones Industrial Average                        14,452.06        - 62.05             - 0.43%

S&P 500 Index                                                  1,552.10        -   8.60             - 0.55%

NASDAQ Composite Index                               3,237.59        - 11.48             - 0.25%

Russell 2000 Index                                               947.20        -   5.28             - 0.55%

                       

The NASDAQ Composite Index was the least affected today by the fallout from the Cyprus situation. Apple, the largest component of the NASDAQ, was up 12.06 points (+2.72%) to 455.72. Apple is now up about 36 points (+8.6%) from its early March low as investor fears over competition from Samsung (among other issues) appear to have been overblown.

Gold, Silver, and Treasury Securities prices were all higher today, but changes were modest (<1% across-the-board), and there were no panic buying spikes that I could see throughout the day in these flight-to-safety options for investors.

Bottom Line: Last night (Sunday), it looked like the DJIA could be down as much as 200 points or more today as investors fretted about the latest problems involving the Eurozone's bailout of Cyprus. However, given the extraordinary gains of the last four months, most U.S. equity prices experienced only minor losses today. Heck, Apple was up 12 points and a daily chart buy signal was actually triggered by my computer system in Caterpillar at today’s close. My strong hunch is that we’re not yet done on the upside and that the S&P 500 Index will test its record high again before a meaningful correction begins. While I remain bearish, I think tomorrow could surprise a few traders on the upside as shorts are squeezed yet again. As mentioned in previous columns recently, I still think the best chance for a sustained downside move is after the FOMC meets this week and then issues its usual post-FOMC policy announcement;  as now scheduled for Wednesday, March 20^th at 2:00 PM ET.

Dow Jones Industrial Average 1-minute Bar Chart for Monday, March 18th

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

On December 5^th, 1996, Federal Reserve Chairman Alan Greenspan made a memorable speech at the American Enterprise Institute. The single most famous paragraph in this speech was the following:

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

The Dow Jones Industrial Average, which had been trading around 6,400 at the time of the speech, fell to near 6,200 over the next 8 trading days before buyers regained the upper hand in one of the strongest decades for U.S. stocks on record. The DJIA would not top out until January 2000 when the “dot com” peak was made at 11,908. Any investor who sold in early December 1996 when Dr. Greenspan intimated that U.S. stocks were overvalued lost out on capital appreciation of +86% (not including dividends).

The same Alan Greenspan reappeared again late last week (perhaps like a bad penny?). In an interview on CNBC’s Squawk Box, Dr. Greenspan said that he doesn’t see any “irrational exuberance” in today’s stock market. In fact, Greenspan said that [equity] markets are “significantly undervalued” now despite the fact that most major U.S. stock market indexes are trading at all-time record highs.

Does anyone hear a bell?

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     14,514.11     -25.03       -0.17%       +117.04        +0.81%

S&P 500 Index                             1,560.70       -  2.53       -0.16%       +  33.00       +0.61%

NASDAQ Composite Index          3,249.07      -  9.86        -0.30%       +  77.56      +0.41%

Russell 2000 Index                       952.48         -  0.59        -0.06%       +  27.75       +1.06%

A 10-day winning streak in the DJIA was broken on Friday, as U.S. equity prices declined in part on a report from Thomson Reuters at its University of Michigan preliminary sentiment index for March fell to 71.8 from 77.6 in February. This widely-followed gauge was projected to increase to 78, according to the median estimate of 67 economists surveyed by Bloomberg. However, over the course of last week, most economic reports were “market friendly” to stocks. Investor confidence is clearly upbeat as measured by the latest weekly sentiment surveys which show relatively high levels of “bullishness” (Consensus Index at 76% Bulls, Market Vane at 69% Bulls, as posted in Barron’s Magazine). With the VIX Index (a.k.a. "Fear Index") now at a historically low level of 11.30 and most sentiment gauges reflecting very high levels of bullishness among often wrong investor groups, perhaps there is just too much complacency now?

When I wrote the Sutton Advisory Letter on a daily basis between 1988 through 1998, I read a research report concerning the performance of the U.S. stock market when the President leaves the country. Unfortunately, I can not find this report now, but I distinctly remember that the numbers were negative (and statistically significant). President Obama AND Vice President Biden will BOTH be out of the country next week, and they may actually be away on the same day (at least for a few hours). President Obama leaves on Tuesday night on a trip to Israel, the West Bank and Jordan. Earlier on Tuesday, Vice President Biden will be attending ceremonies in Rome surrounding the installation of new Pope Francis. What is uncertain is whether VP Biden will be back in the United States by the time President Obama departs on his trip. His official schedule has not been released.  This is just one more worry that investors will have to deal with early this coming week.

Bottom Line: While I remain negative on the U.S. stock market, I don’t think bearish traders can take much of a victory away from Friday’s price action where the DJIA’s 10-day winning streak was broken and the S&P 500 Index fell just 0.16%. As mentioned in my Thursday column (3/14), there are some interesting “cracks” starting to appear in the foundation of this extraordinary bullish advance. Within my computer trading system, Weekly chart sell signals were triggered late last week in Amazon, Salesforce.com, Costco, and the U.S. Dollar Index (DXY). I would like to see some sort of “blow off” top that triggers a sell signal in my computer system before declaring an official end to this advance. Unfortunately, I have a strong hunch that this next inflection point won’t be marked by a buying stampede or “investor capitulation” that is sometimes seen at major tops. Looking ahead to this week, there is a Federal Reserve meeting of its Open Market Committee (FOMC) this coming Tuesday & Wednesday with a policy announcement scheduled for Wednesday, March 20^th at 2:00 PM ET. This type of announcement usually includes brief comments on the Fed’s views of the economy and also how many FOMC members actually voted for and how many voted against the latest policy decision. I suspect that at least some major investment managers in the U.S. stock market may begin to lighten their long positions going into this announcement, especially given recent reports that there may be a growing divide at the Federal Reserve regarding its current accommodative monetary policies. Maybe Wednesday's Fed announcement will be THE catalyst which triggers the next major correction in the stock market?

Dow Jones Industrial Average with Computer-generated Buy & Sell Signals