Monday, March 24, 2014

Change is afoot. Expiration? Rebalance?


- Change is afoot. Indices run higher, reverse to losses. Expiration? Rebalance? Rotation or more?
- International and domestic issues driving markets.
- Fed-speak affirms Yellen's comments.
- Still some excellent upside opportunity though ready to play some downside as well.


The stock market and indeed other markets are showing some change, post-Yellen and even before. Perhaps they are just digesting the Yellen 'considerable time' definition. Maybe, but some of the move started before the Wednesday FOMC press conference though it was no doubt exacerbated by Yellen's comments. Perhaps there is rotation into new areas taking place. Perhaps the overall bull run based on QE is facing its end as QE continues its withdrawal and the economy and thus market have to rely on old fashioned growth. The following discusses those changes then we take up the market action.

Geopolitical changes.

The past few weeks injected some uncertainty abroad and domestically. With the invasion of Crimea, geopolitical issues are heightened to seemingly forgotten levels. Russia has Crimea and is making the same comments that led to the Crimean annexation about East Ukraine and Estonia. An aggressor sees an opportunity and is taking it as the world appears more transfixed by a missing airplane than countries that come up missing.

This adds to and perhaps exacerbates the ongoing situations in Syria where Russia dominates the conversation, Iran, North Korea, China/Japan conflict, and perhaps Venezuela and other South American countries.

Indeed, Friday we learned that Russia is ready to announce a natural gas supply agreement with China, its new-found friend after decades of animosity, and the two are talking about a commodity-backed currency to supplant the dollar. This alliance and its aims truly threaten the dollar as the world's reserve currency. A power play is underway between the US, China, and Russia, and it is no forgone conclusion as even the US has publicly admitted its weakened position by virtue of the Defense Secretary's 'the days are gone' comments regarding the US' ability to dominate the air and seas.

Sure China has its problems (economic bubble caused by too much stimulus, massive pollution that will sap its economy, corporate defaults gain speed the past week) as does Russia (still a rather smallish, totally commodities dominated economy), but the US has some of the same issues (massive debt, massive increases in government and regulation, giving up principals of free markets and free markets that made it strong) . A loss of the reserve currency status would be a huge blow to the US given its fiat currency is supporting so much debt and greatly disrupt the balance of power, reducing the US' ability to influence world events. Some may think that is a good thing, but the consequences to the US economy are not.

Economic issues

Economically, the data continues suggesting economic improvement, but still no great economic run. We have come out of the Great Recession, if we really have given the 100+M still unemployed or out of the workforce, 46+M on food stamps, weekly wages hitting a four year low. Tax receipts are at an all-time high, a phenomena that occurs after taxes are initially hiked in a moderate economic recovery, indicating that some areas are working. The US could be energy independent, giving it a great leg up on any competition, as that sector is the one area clearly leading the US economy and pulling several other sectors with it as the demand for oilfield related equipment surges.

The problem is that even with those jobs, most of the jobs created are low-paying service sector jobs. The policies the Administration has implemented, claimed to raise the middle class, are razing the middle class. All semantics. All lip service. The US middle class has never been this strapped since the Great Depression. Fitting I suppose given the report released two weeks back that crunched the numbers and now says this recovery is the worst in US history, worse than the recovery from the Great Depression.

On top of that you have the FOMC in the position of having to withdraw stimulus. Too much for too long. It had its intended effect, i.e. inflating financial assets. Though Bernanke had said the same thing many times before, Friday comments from Dallas Fed President Fisher made headlines when he said QE was a 'massive gift intended to boost wealth' and that the 'efficacy of QE has been exhausted.' QE is going to be removed as there will be no taper outside financial market collapse. Then rates will rise. Yellen said so and on Friday Mr. Bullard confirmed this saying that the 6 month comments were 'in line' with Fed surveys.

Thus the die is cast: Stimulus will be removed and it is up to the US economy to take over without the training wheels. Unfortunately, it is having to take over in a still weak state as the recovery is weak and there are extraordinarily serious world issues confronting the US.

Thus it is no wonder there is some change in the markets as they adjust to the recent domestic and international events in an attempt to assign the correct value to assets post-QE and in a new world where the dollar is threatened.


The Action

Stocks lost ground Friday after what was considered a good Thursday. As we pointed out, however, Thursday was not good as the indices gained on low trade, breadth was at best flat, and leaders were stumbling further. Expiration and index rebalancing dominated the Friday action as stocks opened higher then sold off. After a day of opening higher and closing higher last week, the older pattern returned: higher open, lower close. The indices showed potential reversal patterns: the push higher then reversing downside. Massive volume though it was expiration and rebalance day.

The indices did not break their trends. Thus there could be ongoing rotation as we noted in the reports this past week. Financials are getting money and despite some breaks in some leading stocks in the category, chips/electronics still look quite good. Rotation can look like a market readying to break down. Thus is it very important to keep an eye on sectors to see which start to move higher, if any. There are still sectors looking quite good, and thus you need to be ready to act upon where the money is moving. At the same time, however, you must be ready to act to the downside if stocks overall break or even if you just want to play some areas that were leading but are now suffering outflows of cash.

SP500 -5.49, -0.29%
NASDAQ -42.50, -0.98%
DJ30 -28.28, -0.17%
SP400 -0.13%
RUTX -0.44%
SOX -0.87%

Volume: +107% NYSE, +62% NASDAQ

A/D: NYSE 1.4:1, NASDAQ -1.4:1

Growth was the clear laggard as NASDAQ took a sharp hit as it reversed in a high to low engulfing pattern. As noted, no trend breaks but some character change is occurring.


Euro/Dollar: Dollar weaker after a big surge off support post-FOMC/Yellen comments.

1.3794 versus 1.3776 versus 1.3831 versus 1.3930 versus 1.3925 versus 1.3907 versus 1.3858 versus 1.3907 versus 1.3870 versus 1.3869 versus 1.3872 versus 1.3857 versus 1.3735 versus 1.3737 versus 1.3730 versus 1.3805

Dollar/Yen: Lost just a bit of ground after surging higher Wednesday.

102.25 versus 102.42 versus 102.51 versus 101.40 versus 101.75 versus 101.29 versus 101.67 versus 102.71 versus 102.90 versus 103.24 versus 103.33 versus 103.07 versus 102.31 versus 102.19 versus 101.38 versus 101.82 versus 102.10 versus 102.38 versus 102.16 versus 102.47 versus 102.51 versus 102.35 versus 102.25 versus 102.43 versus 101.86

Bonds: After a fade Wednesday and Thursday, bonds surged Friday, holding over the 50 day EMA.

10 year: 2.77% versus 2.78% versus 2.77% versus 2.67% versus 2.70% versus 2.65% versus 2.65% versus 2.72% versus 2.77% versus 2.78% versus 2.79% versus 2.74% versus 2.69% versus 2.67% versus 2.60% versus 2.66% versus 2.69% versus 2.67% versus 2.70% versus 2.74% versus 2.73% versus 2.75%

Oil: 99.55, +0.65. All week oil moved laterally below the 50 day EMA. Broke through on Friday but could not hold the move.

Gold: 1335.80, +5.60. Hard week as gold started selling even before Wednesday's FOMC meeting. Easily held above the 50 day EMA and indeed bounced modestly Friday, but not a strong attempt to recover.


Stats: -42.5 points (-0.98%) to close at 4276.79
Volume: 2.959B (+62.31%)

Up Volume: 979.59M (-60.41M)
Down Volume: 2.08B (+1.289B)

A/D and Hi/Lo: Decliners led 1.38 to 1
Previous Session: Advancers led 1.09 to 1

New Highs: 172 (+31)
New Lows: 24 (+1)

Stats: -5.49 points (-0.29%) to close at 1866.52
NYSE Volume: 1.187B (+107.52%)

Up Volume: 2.58B (+490M)
Down Volume: 2.49B (+1.32B)

A/D and Hi/Lo: Advancers led 1.41 to 1
Previous Session: Decliners led 1.01 to 1

New Highs: 207 (+105)
New Lows: 82 (-1)

Stats: -28.28 points (-0.17%) to close at 16302.77


Potential reversal signals last week but nothing that broke the trends. Friday was mixed with NYSE large caps holding on better thanks to the rise of financial stocks last week, but all indices showed a negative signal with high to low reversals. Big volume but that was attributed to expiration and index rebalance.

SP500: Surged to a new high then reversed to close negative. No trend break, no support break. The financials rose last week in a rotation to that sector. But note: they didn't do a darn thing for the index.

NASDAQ: Recovered last week from the early March selling, but did not move to a new high, did not threaten a new high. It started losing some leadership on the week. It did not break, but it tested the November 2012 upper channel line for the second time in two weeks. Friday was a gap higher to a high for the week but then it reversed to close on the trendline. Weakening but has not broken.

DJ30: One of the Thursday leaders, the Dow rallied again Friday but posted a pretty spectacular reversal as it moved through the trendline then flared out and closed below it. Still lagging the other indices.

RUTX: Small gaps spent all wee bumping a long term trendline starting back in the 1990's. Look at the 20 year RUTX chart. Look at the magnitude and angle of the last move from 2012. This cannot sustain. No other run in the past is this big or straight higher. Even if some of those prior rallies were built in part on easy money (though mostly economic growth) this current move is massively out of the norm. Even those moves built on economic growth had to correct hard. This one is built on QE. QE is ending. Even with a 'normal' economy, this move is unsustainable. It will correct.

SOX: SOX is clearly the market leader. Broke to a new decade high with this last move starting in early March. Gapped, tested and last week surged higher. Friday was off but SOX remains the leader in the stock market, and it has room to move versus sitting on top of a big, historically outsized run. You see, SOX too has posted a dramatic rise off the November 2012 asset buying initiative, but note that its long term chart is nothing like the other indices. It is in a multiyear trading range, now bumping at the top of the range, just breaking higher with this last move. SOX could be on the brink of a new level of trading, and how it tests this move will tell the tale.


VIX: 15; +0.48
VXN: 17.35; +1.17
VXO: 13.26; +0.17

Put/Call Ratio (CBOE): 0.9; +0.14

Bulls and Bears:

Bulls retreated from almost extreme levels. Still elevated.

Bears again holding at 17: 17.4 versus 17.4 versus 15.1 from 17.2 for two weeks and 17.4 for three weeks prior to that.

Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.

Note the extreme bullishness: it was this high in 2007 at the crash, in early 2005 as well.

Bulls: 52.0 versus 55.1%
54.6% 53.5% 46.5% 41.8% 45.9% 53.1% 57.6 56.1 60.6% 61.6% 60.0%
58.2% 57.1% 55.7% 53.6% 52.6% 55.2% 52.6 49.5 42.3% 45.4 46.4% 44.3% 42.3% 37.1% 37.1% 38.1% 43.3%.

Background: Last undercut 35%, the threshold for bullishness, in early June 2012.

Bears: 17.4% versus 17.4%
15.1% 17.2% 17.2% 17.4% 17.4% 15.3% 15.1 15.3% 15.2% 15.2% 14.0 14.3 14.3 14.4 15.5 15.5% 15.6% 16.5% 18.5 21.6% 20.6% 18.6% 20.6% 21.6% 22.7% 23.7% 23.8% 21.6%.

Background: Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


The past week the stock market and other markets had to deal with new realities. The end of QE is real as is the time of easier money. The new Fed chairman put a time on it. QE reductions continue at $10B/meeting. With $55B/month after the last reduction, you are looking at roughly 6 months until zero, then six months to start raising rates. 12 months is about how long the market looks ahead. Thus, it got the news as to the timetable and it is such that it has to deal with it now in addition to the issues from the rest of the world. Thus the turmoil last week.

Sure it didn't seem like much on the surface. All of the indices held their trends and heck, they were even up Thursday after the FOCM meeting. Financials rose as money moved their way given the Fed's signals. But what is good for financials good for everything else that has risen on QE? ONLY if the economy recovers at a better pace. It is showing signs of improvement but I am concerned it is just more of the modest recovery, not the historical US strength. If that is the case, there is no way these high stock prices are justified, and the hiccups seen last week might well be the precursors to long corrections as seen in the long term charts of the indices reviewed earlier.

That said, looking at the electronics/chips area there are still many very good setups, and coupled with the breakout from a long-term trading range, this could be a very good area to mine for the upside. Indeed we are looking at this area again this weekend for more upside.

At the same time there are big names breaking, and indeed some of the indices are in position to play if they break. If the market ends up topping, it takes time for it to happen. As with any move, however, there are early leaders, in this case stocks that fall first. We will look at playing some of those, and if the move develops, more will arise. If not, we make some money on stocks that needed to correct as they set up for new upside moves.

Again, the indices remain in their uptrends and indeed SOX is breaking through old resistance. We still want to play that trend even if some names that led the last move struggle. As noted Thursday, perhaps they will set up again and return to aid a further market rally.

Times of change are always tough on investors because turns are what hurts the most. Thus we went ahead and closed some positions Thursday and Friday and indeed have pared positions overall over the past few weeks as the change started to take shape in individual stocks.

This week we have looked at many sectors in the market and see many undergoing change. It is still time to be patient, but that does not mean just ignoring stocks. There are still great opportunities in electronics and indeed drug stocks despite some big name hits. We looked exhaustively at financials and there may be some possibilities develop off the initial run. We want to see good tests, however, to commit money, and even then the stocks that CAN produce good gains are few.

So, a bit of patience but that simply means playing very good patterns in sectors that are still strong. Electronics is one. At the same time we will look at downside plays given the market is in change, and if it breaks we can play some early movers and then many more on tests of initial drops.


NASDAQ: Closed at 4276.79

4289 is the July 2000 recovery high
4372 is the March 2014 high

4277 is the March lower gap point
4272 is the upper channel line for the November 2012 to present uptrend.
4246.55 is the January 2014 peak
The 50 day EMA at 4225
4173 is the November 2012 trendline
4104 is the lower gap point from 12/20/13
4070 is the series of highs from late November/early December
3991 is the prior November 2013 high and the post-bear market high.
3967 is the October 2013 post-bear market high.
The 200 day SMA at 3880
3855 is the November low
3819 is the early October high
3801 is the September 2013 high.
The October low at 3750
3697 is the August high and a prior post-bear market high in the recovery.

S&P 500: Closed at 1866.42

1883.57 is the recent all-time high hit in early March.

The December and January highs at 1848
The 50 day EMA at 1837
1830 is the December 2012 up trendline
1808 is the November and December 2013 twin peaks
1775.22 is the October prior all-time high
1768 is the December 3013 low
The 200 day SMA at 1743
1730 is the September 2013 peak
1710 is the August 2013 peak.
1698 to 1700 are the July and August interim highs
1687 is the May high and post-bear market high
1685 is the mid-August 2013 upper gap point
1657 is the late August upper gap point
1654 is the June 2013 peak
1646 is the October 2013 low just before the surge into early 2014
1627 is the August 2013 low

Dow: Closed at 16,302.77

16,359 is a lower trendline off the 11/2012 low
16,506 is the March 2014 peak
16,589 is the December 2013 all-time high

16,257 is the January 2014 low
16,179 is the November 2013 peak.
The 50 day EMA at 16,157
15,739 is the December 2013 low
15,696 is the September 2013 peak
15,659 is the August 2013 peak
The 200 day SMA at 15,647
15,542 is the May 2013 intraday high
15,318 is the June closing high
15,050 from the August 2013 interim recovery high
14,888 is the April peak and prior all-time high
14,844 is the June intraday low
14,762 is the August 2013 low
14,551 is the June 2013 intraday low on the selloff (14,659 closing)
14,198 from the October 2007 high
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation

Economic Calendar

March 25 - Tuesday
Case-Shiller 20-city Index, January (9:00): 13.3% expected, 13.4% prior
FHFA Housing Price I, January (9:00): 0.8% prior
Consumer Confidence, March (10:00): 78.2 expected, 78.1 prior
New Home Sales, February (10:00): 445K expected, 468K prior

March 26 - Wednesday
MBA Mortgage Index, 03/22 (7:00): -1.2% prior
Durable Orders, February (8:30): 1.0% expected, -1.0% prior
Durable Goods -ex transports, February (8:30): 0.3% expected, -1.1% prior
Crude Inventories, 03/22 (10:30): 5.850M prior

March 27 - Thursday
Initial Claims, 03/22 (8:30): 330K expected, 320K prior
Continuing Claims, 03/15 (8:30): 2900K expected, 2889K prior
GDP - Third Estimate, Q4 (8:30): 2.6% expected, 2.4% prior
GDP Deflator - Third, Q4 (8:30): 1.6% expected, 1.6% prior
Pending Home Sales, February (10:00): -0.2% expected, 0.1% prior
Natural Gas Inventor, 03/22 (10:30): -48 bcf prior

March 28 - Friday
Personal Income, February (8:30): 0.2% expected, 0.3% prior
Personal Spending, February (8:30): 0.3% expected, 0.4% prior
PCE Prices - Core, February (8:30): 0.1% expected, 0.1% prior
Michigan Sentiment - Final, March (9:55): 80.0 expected, 79.9 prior

By: Jon Johnson, Editor
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Jon Johnson is the Editor of The Daily at

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