U.S. Stock Market - March 8th Week In Review

Surprisingly strong “headline” U.S. employment results for February, as reported early Friday morning, served as the catalyst for higher stock prices, lower bond prices, and a stronger U.S. Dollar. The Dow Jones Industrial Average posted another record high, jumping 69 points on Friday and gaining 307 points (+2.18%) on the week. From my chair, very few bearish “non confirmations” can be found and almost every major index is in-sync on the upside. Dare I say that you have to be a masochist or a complete fool to be in the bear camp right now? Maybe so, but that’s where I am. Maybe Mark Twain said it best, “Let us be thankful for the fools. But for them the rest of us could not succeed”.

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       14,397.07      + 67.58       +0.47%        +307.41         +2.18%

S&P 500 Index                                 1,551.18      +   6.92       +0.45%        +  33.00          +2.17%

NASDAQ Composite Index              3,244.37      + 12.28        +0.38%       +  77.56          +2.45%

Russell 2000 Index                             942.50       +   7.93        +0.85%       +  27.75          +3.03%

For traders who came in “flat” Friday morning, the news-related upside gap opening represented a perfect entry point for potential short sales. This “sell the [good] news” tactic following an extended bullish advance is usually considered a solid risk/reward trading opportunity. For those that took advantage of this situation early Friday, short-sales on this upside gap were immediately profitable. However, if you weren’t a day trader, all the potential profits were lost by the closing bell as most major indexes rallied back to end the day near their best opening levels.

Was Friday’s price action a form of “capitulation” by the bears? Or is there still an abundance of “sideline cash” attempting to play catch-up on one of the best 15-week stock market rallies in history (SPX +15.47% since November 16th intra-day low). The math is simple: unless you were the greatest stock picker on the planet, every investment manager with any significant cash reserve is now behind their benchmark since November 16^th. And if you had Apple in your portfolio (which almost everyone did because it was the biggest stock in the world in November?), your investment returns are even worse (Apple is down 18% since November 16^th).

So what does it all mean?

U.S. stock prices could easily move higher from here, that’s for sure. In fact, anyone with "common sense" would tell you that stocks WILL go higher, because it's obvious "we're in a bull market"! As the great Marty Zweig said, “Don’t fight the Fed!” And anyone with common sense would also never write a financial markets blog where forecasting failures are inevitable given the nature of the beast. Here are some reasons why I remain bearish despite Friday’s stellar upside action and a friendly Fed:

1. Friday’s bullish “headline” employment numbers masked significant weakness in the overall jobs picture. The headline number was +236,000 jobs “created” in February as reported in the Establishment Survey. If we look at the Household Survey, the headline number was +170,000 jobs created, slightly less but still pretty good. However, the small print of the Household Survey indicates that +446,000 new jobs were considered “part-time” in February. This means that there was an actual loss of  276,000 full-time jobs in February. This makes much more sense given the latest monthly report from Challenger Gray indicating that US employers announced 55,356 job cuts in February, a 37% jump from January. Reported layoffs in February rose to a level only seen twice in the last 16 months.
2. The U.S. Dollar has been fairly strong in foreign exchange dealings lately. The popular DXY Index (a weighted geometric average of six major currencies) is now up 4.79% since February 1^st. Maybe a strong Dollar is a good thing, but since about 50% of total sales by corporations in the S&P 500 are “foreign sales”, it’s not hard to figure out that currency translations (back to the U.S.) will be negatively impacted and U.S. exports will be less competitive given the stronger Greenback.
3. And what about Wal-Mart’s mid-February email leak that indicated early February retail sales at the world’s largest retailer were “a disaster”! I guess we’ll find out soon enough as the Commerce Department reports February U.S. Retail Sales this coming Wednesday, March 13^th at 8:30 AM ET.
4. The U.S. stock market shrugged off Friday's announced Fitch downgrade of Italy’s sovereign debt. Despite the best efforts of the ECB, additional downgrades can be expected across troubled Europe over the near-term, and let’s not immediately rule out rumors of a potential downgrade to U.S. debt if negotiations on the debt ceiling break down between now and March 27^th (the next big date on the U.S. budget/spending calendar).
5. The latest weekly investor/trader sentiment surveys, as published in Barron’s, are a little high (Consensus 74% Bullish, Market Vane 69% Bullish), but those numbers have been high for a while now. By definition (because we’re at all-time highs in the stock market), there are many technical gauges that are “overbought”, but just as with sentiment figures, these numbers have been overbought for quite some time as well. I guess what bothers me the most is that few in the financial media seem to be reporting on the potential negative consequences of higher gasoline prices, or higher payroll taxes, or North Korea’s threat to use its nuclear weapons on its southern neighbor and maybe even the United States. The fact that more and more U.S. corporations are reporting major computer hacking incidents is almost “under the media radar”, and the fact that Corporate Insiders have been selling their own stocks aggressively so far this year is also under-reported. The VIX Index on the CBOE, which is sometimes called the “fear index”, is historically low at 12.59, which was down 18.03% last week. The VIX is now down 30.13% year-to-date so far in 2013. A historically low VIX does not necessarily mean that a correction is imminent, but it does suggest a clear picture of complacency among stock investors right now.
6. If we eventually do experience a stock market correction, the reasons sited by the media for this correction will almost certainly be among the factors suggested in 1 through 5 above. However, for now these negative factors all mean almost nothing without some sort of negative trigger or an overhead technical resistance area that just can’t be overcome without a “pause that refreshes” or a pull-back that finds powerful underlying bids. For your review, I have attached the monthly bar chart for the S&P 500 Index, which offers the appearance of a dangerous “triple top” formation. In my own technical work (which can only be described as “eclectic”), I have numerous bearish symmetrical formations that project to a major top at current levels or just above current levels.

Bottom Line: I remain negative on the U.S. Stock Market, and I strongly believe that an important downside reversal could unfold at any time. While it may be true that the term “Black Swan event” is used too often now to justify bearish positions in this obvious Bull Market, my research suggests the increasing likelihood of a negative surprise on the near-term horizon. Maybe we should just close our eyes and “don’t fight the Fed” with its never-ending QE policies. However, I don’t think it will take too many negative speeches by the growing list of hawkish Fed Governors to unsettled now-complacent stock investors. With the U.S. Stock Market at record highs now, you can expect to hear those hawkish speeches more frequently with each passing day.

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