U.S. Stock Market Rally Continues Amid Negative July 2014 Global Headline Risk

globe - world markets

The next leg of the rally may have just begun:

The U.S. stock market continues to be the ‘most hated rally’ in history.  Long-term holders have been rewarded for their patience while short-term buyers are rewarded for purchasing on dips. Even global headlines that were extremely negative have not dampened bullish sentiment.  Here are 3 recent events that didn’t stop the buying momentum:

  1. The issues in the Ukraine didn’t stop buyers from taking new positions.
  2. The Portugal banking crisis was short-lived -although it may return.
  3. Equities rallied after the start of the Israeli ground operations.

In short, global headline risk hasn’t changed bullish sentiment and a true rally begins to have pressure when retail investors get more interested in buying stocks again.  There is still a lot of cash on the sidelines so hedge funds and institutional buyers need to put money to work.

Janet Yellen signaled to investors a word of caution regarding biotech and social media stocks but perhaps she wasn’t considering expected profits for companies like Facebook or was looking strictly at Twitter.  The social media sector boom should continue for some years to come because online profitability is no longer limited to Google.  The economy remains in slow growth mode and reduced QE hasn’t caused bulls to throw in the towel.

Technical Analysis and Economic Fundamentals:

The small cap sector has been rangebound for the last few weeks and may be a medium-term buying opportunity while it’s at the lower end of its recent price range.  Concerns about small caps would be warranted if Facebook, Apple, Google and other momentum stocks were underperforming the market.  Most moving averages are positively sloped and short-term moving averages have flattened since Thursday’s sharp decline and rise in volatility.  The S&P 500 is up 7 percent for the year while the Nasdaq is up nearly 10 percent and July has been a positive month for most stocks even with negative headline risk permeating the news.

Equity buyers are still in control and follow-through this week by the S&P 500 or tech/bank earnings could build more momentum even as bonds become more attractive.  When bonds and stocks are going up, this indicates more money coming into U.S. markets and could be considered the sweet spot of the ‘hated rally’.  Increased money flow and confidence central banks will add liquidity is a strong reason to maintain a bullish posture as the ‘Yellen-put’ continues to lift asset attractiveness. If small caps can find support and companies show expanded profits this week, expect the Nasdaq to hit new highs.  Watch mid caps carefully to evaluate whether continued buying at distribution entry points will continue to work for investors.  Dow 18,000 is still possible this year.

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Dow Jones Looks Poised for 18,000


dow 18000

The Dow Jones Industrial Average looks ready to set a new all time high of 17,000 after continued follow-through since the Fed meeting last week.  Market participants where rationally exuberant after Janet Yellen kept on course and didn’t rock the boat with higher quantitative easing.  As expected, the FOMC kept the rates constant and trimmed QE bond buying by 10 billion which sent markets roaring higher with the S&P 500 hitting new highs and small caps continuing to breakout.

Inflation bugs were temporarily disappointed, but the economy isn’t improving at a growth rate that would make rising prices a problem and there is no need for the Fed to signal additional efforts to trim a marginally growing economy.  Many inflation watchers have been wrong for the last 7 years since the Great Recession began and it would take two consecutive quarters or more of exponential growth to make the economy susceptible to pressures from rising core prices.

The IMF decreased its forecast for U.S. economic growth by 0.8 percentage points to 2% last week and this is more evidence that the economy isn’t in expansion mode with risks to the downside still prevalent.  Several months of political partisan bickering have now yielded the continue slow growth warned about here based on almost endless possible government shutdowns and low certainty is now having its medium run impact on the economy.

Continue to watch small caps for any signs of increased investor sentiment and ignore volatility which hasn’t been a useful indicator over the last few months.  A sharp change in sentiment is possible but the path of least resistance seems to be upward in the short-run.  Investors looking for growth have not yet abandoned small caps or tech which is a positive sign for bulls.  The Dow could go as high as 18,000 barring a steep correction.  Watch the Dow Transports in the short-term.

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Why Sell In May And Go Away Didn’t Work Again In 2014:


The economic data got worse.

The old saying “sell in May and go away’ could be changing to ‘buy in June and don’t sell soon’. The analysts who have been negative and expected the market to reverse are seeing the bulls in full control. Buying on dips has been working for several months and leading sectors like tech/social media and small caps have maintained momentum. This is a sign of a healthy market and selling in May didn’t work last year either.

The Fed hasn’t shaken up the market and traders seem to like Janet Yellen’s disposition and composure. In short, the new Fed head hasn’t rocked the boat. But why? Probably because after an extremely cold winter, the economy didn’t bounce back yet and although nominal unemployment is stabilizing, the economic data reveals the U.S. is still in grow slow mode with housing lagging and the new Fed head has no real reason to signal changes are coming. Even if she did, the market wouldn’t believe her with each new economic data point showing weakness.

Here is a brief highlight of last week’s economic news.

  • The Labor Department reported last week its new Producer Price Index for Final Demand dipped 0.2 percent in May.
  • Initial jobless claims increased by 4,000 to a seasonally adjusted 317,000 for the week ended June 7.
  • The Commerce Department said on Thursday that retail sales rose but much less than expected. Retail sales gained 0.3 percent which was well below the 0.6 percent rise expected forecasted.

This is just a snapshot of last week and it hasn’t been a particularly hot summer yet which could keep retailers in the red until Black Friday. Keep buying during pullbacks and worry about corrections after a definitive – prolonged downturn by leading sectors.

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March 2014 Technical Analysis – Are Bears Done Hibernating?

Another Short-Term Buying Opportunity?

Stocks have retreated in the last few days giving buyers an opportunity to purchase equities with the S&P 500 now flat for the year.  The Standard and Poor’s 500 index is down .4 percent with the NASDAQ up 1.6 percent and the Dow down 3.1 percent year to date. Even high momentum stocks like Facebook and Tesla have taken a hit although the latter had a significant ruling against them that was negative in New Jersey regarding dealerships.  (Clearly Tesla is onto something and the old car makers can’t continue to allow them to gain share.)

The Economic Picture Doesn’t Look Great:

Is the stock market in correction mode? Probably not because the major trends are still positive - but this could change if buying on the dip gives way to bears out of hibernation.  The economic indicators don’t suggest the longer-term rally is over with unemployment is rising which could cause the Fed to reduce tapering or stop it completely.  After two snowy months, economic activity will be reduced in the short-run although the snow could actually be good for the economy when the yearly tally is done.

In February, the U.S. economy created 175,000 jobs which was slightly higher than expected but the unemployment rate rose to 6.7 percent from 6.6 percent because the labor force participation rate remained unchanged at 63 percent. If the labor participation rate is constant for the for the last 5 years, unemployment would be closer to 10 percent.  Furthermore, consumer confidence as measured by the university of Michigan survey was down .2 to 79.9 while analysts expected a .7 gain.

Technical Analysis of the S&P 500 March 2014

The SP 500 has hit its 50-day moving average and it’s important to look for small caps and tech to turn the corner.  After several distribution days, institutions may be on the verge or adding to their shopping lists and after a 38 percent year for the NASDAQ, retail investors will return with tax returns to invest in the market. It’s time to put the toes in the water since there was no parabolic swing in stocks which one would expect before the end of a long-term rally.  It might be prudent to buy on the dips conservatively and when external factors like Russia or China have traders worried, it could be a buy signal.


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Finally, A Chance To Buy Stocks Again After A Stellar 2013

Time To Look For Opportunities:

The stock market has finally given buyers a chance to reevaluate new entry points.  After a stellar 2013 with the S&P 500 having its best yearly gain in 16 years and the Dow rising at the highest level annualized in 18 years, equities proved to be the right move.  Our ToryCapital predictions for 2013 were right on target (-the 2014 predictions are coming soon).   The NASDAQ was up 38 percent and equites have only looked back slightly with a minor dip since November.  Stocks have been losing ground for the last few days and the key concern for those looking to reenter the market is if the current fade is part of a longer-term reversal.

The overall long-term market trends still seem to be in tact but this could change if shorts decide to push new buyer sentiment lower and get no resistance.  The 50 day MACD for the S&P 500 has been a reliable level of support for the last couple of years and the sharp fall in prices in the final minutes of trading Friday suggest shaky holders have given the market what it needs to stabilize with a major distribution day.

It’s time to create a shopping list and begin looking at stocks with long term growth prospects. I am partial to digital media sector and the financials.  If they break current support levels, I would reevaluate the longer term trend and look for buy points for medium term holds.  I am looking for new leaders in the social media space to help decide if there could be sector rotation in favor of large cap stocks.  A significant rise in small caps would make me less patient with my shopping list.

FOMC Meets This Week: Will Yellen Yell?

The FOMC meeting this week may acknowledge the low participation rate concerning jobs growth and signal a willingness to hold QE levels steady without causing nervousness about unnecessary tapering. Janet Yellen doesn’t want to rock the boat, but she may soon decide to show the world she is the new sheriff in town to increase her future signaling power.  This could be key to determining whether longer-term sentiment shifts back to bonds and decrease risk taking which the economy cannot afford with real unemployment at 10 percent using a constant labor participation rate averaged over the last five years.  A sharp bullish reversal is possible but buying on the dip remains a good strategy in the medium run.

s&p 500 six month chart week ended January 24 2014

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Stocks Don’t Look Back: November 2013 S&P 500 Technical Analysis

The stock market has been resilient for the last few weeks only pausing to go much higher.  Naysayers have watched in awe as the major indexes continue to rise without any significant pullback. We mentioned in our last article that we expected some level of negative rate of change in the major indexes but not a significant correction. The economic news remains mixed and questions about QE have increased although it looks unlikely that Janet Yellen will push away the punchbowl soon.  It might be too much for stock market participants to evaluate a  new Fed chairperson and plan for monetary policy at the same time.

The major averages are still on a positive trajectory however there may be some concern about momentum stocks and high flyers that have yet to rebalance substantially.  It’s possible the  current market rally is ready for another leg and the financials exchange traded fund (XLF) has reached multiyear highs.  If the market goes much higher from here this could be a sweet spot where more investors begin to find out that the market won’t be looking back and momentum chasers as well as money managers who have been behind the major averages decide holding cash doesn’t pay.

I’m carefully watching the IWM and slowly adding to social media stocks while checking and mid-cap for resilience.  Without leadership from momentum stocks, this could be evidence of sector rotation and money will flow back to the winning stocks, otherwise be suspicious of the relative strength indicators for the major averages. Regardless is hard to bet against this market with positive moving averages at different ranges I follow closely.

s&p 500 november technical analysis chart november 23 2013 six months


Stocks remain a standard deviation away from the 50 day moving average but the positive slope suggests traders are interested in looking for bargains when they see them.  Pullbacks have been short and may continue to be longer term buying opportunities.

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S&P 500 Technical Analysis Update October 2013

Now that we’ve got the government shutdown and the debt default behind us, figuratively that is, which way is the market headed?  The lack of economic data for the past 2 weeks has kept the focus away from earnings and jobs as most investors stayed in protection mode wondering if the government would default on its debt obligations.  Those who speculated the U.S. would remain unscathed after the first debt default in over 200 hundred years should be ignored entirely henceforth.  It would have been a stain on the country that would not be removed with another hundred years.  The Obama haters came out of the woodwork on this one and perhaps went a bit too far but regardless, Republicans managed to get Obamacare pushed back again.

Yesterday’s dismal jobs number shows the impact of the sequestration, government shutdown and debt default was extremely negative.  Only 148,000 new jobs were created in September 2013 which is far below the 6 month moving average.  This means worse numbers are on the way and the Fed was ahead of the curve when it decided not to taper, much to the chagrin of investors not looking carefully at the political headline risk caused by bickering in Washington.  The S&P 500 hit new highs after the debt ceiling was raised and although data will be mixed-negative, it’s possible some distribution days could occur in the short-run.

The S&P 500 had two near reversal days this week but traders were able to gap the market down yesterday, although intraday session activity was slightly bullish.  I expect the Fed to be more adamant about the possibility of more quantitative easing and I am wholeheartedly ignoring those who believe it has done nothing.  Due to the troubling political landscape in the past 5 years, the stock market would have had no reason to rise without cheap money pumped in by the FOMC and global central banks.

s&p 500 technical analysis october 2013 six month chart

The S&P 500 is a full standard deviation higher its 50 day moving average which could be a reason to be cautious but constructive.  Buying on dips has been a good strategy for the last few weeks but the rise-run rate seems a bit over extended and our volume weighted average methodology shows a possible pullback could be in order.  Expecting pullbacks in the market this year hasn’t paid off so one must remain attentive and look for bargains. It’s a sector-pickers market so continue to watch small/mid caps for clues on market direction.

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Does The Stock Market Want An October 2013 U.S. Government Debt Default?

No – However…….

The U.S. government has been shutdown for the past 2 weeks and the market has been exceptionally resilient. Two weeks ago I speculated the U.S. government shutdown would have little or no impact on market sentiment. The small cap exchange traded fund IWM wasn’t signaling a sharp decrease and tech stocks declined rapidly then rebounded.
Now the biggest issue facing the US economy is a possible debt default.  After President Obama became “the President who cried shutdown” too many times, markets are becoming conditioned into believing a debt default won’t do much to hurt the economy in the long run.

This could be problematic. Political economy headline risk is high in the short-run which is causing economists to ignore the long-run impact of high deficits crowding out investment and decreasing growth. A country that has setup a budgetary process where a budget is never completed won’t continue to be a leading economy.  Republicans are behind in the polls but way ahead with their true constituents who don’t like Obama and seek to disrupt his presidency and stain it permanently.  This has forced team Obama to deal with them directly giving Republicans an edge they haven’t had for years. The U.S. survived its first downgrade ever a few years ago and speculation is rising that in the long-run the U.S will be unscathed from a self imposed debt default that doesn’t stem from a lack of funds. This approach needs caution but was growing last week as a potential outcome.

President Obama’s team should be cognizant that there are forces willing to make him look bad even if it costs them money in the short-run.  America will be around long after Obama so this thinking isn’t completely illogical. If the debt ceiling is raised, it will be good for the market temporarily but high deficits indefinitely, will not.  Last week’s buying opportunity could prove to be significant if money managers who have trailed the market all year realize they only have a couple more months to get it right.  Continue buying on dips.

The six month chart of the IWM exchange traded fund shows small caps have been impervious to Washington D.C. political woes and shorts had only a brief opportunity to take advantage of political chaos.  There has bee no real change in run rate.

iwm technical analysis chart october 2013

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Does The Stock Market Want An October 2013 Government Shutdown?

Political uncertainty is reaching new unanticipated levels now that the government may shutdown next week.  The partisan bickering between the Republicans and Democrats looks irreconcilable and a “Contract With America”/hold hands moment seems highly unlikely.  Most market participants have focused on the possible Fed tapering in September 2013 and have shunned the effects of a government shutdown and its impact on the market.

A government shutdown could be welcomed by the markets in the intermediate-run. A shutdown almost categorically makes Fed tapering less probable and this could be good for equities, but the ride could be turbulent as bears have been gaining momentum until late last week.  A government shutdown has possible long-term consequences that could be positive since political posturing and partisanship are at exaggerated levels.

A shutdown would get people talking and the Republicans don’t write the checks right now – President Obama does.  The Democrats have been playing this hand for 5 years now and Republicans may be better served to allow the government to shutdown because the economy is close to a welfare state at 7.3 percent unemployment with basically – unlimited unemployment insurance.  The “who to blame” aspect is much trickier than it was with a fresh, new 1st time African-American President.

Passing Obamacare made it a moving, never-ending target.  A shutdown will hurt both parties but the market could get used to low interest rates indefinitely.  We are constructive on markets looking for leadership from small caps (the Russell 2000 reached another multi-year high last week) and “new tech”.  Buying on dips may be a solid strategy in the next few days depending on any increase in political uncertainty that takes out weak holders.

The chart below shows IWM investors haven’t worried about a government shutdown — yet.


iwm technical analysis chart 6 months ended october 2013

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5 Reasons The Fed Didn’t Taper, As I Expected….

tapering leg pants analysis

Ben Bernanke didn’t taper today and stocks soared.  Most people began to whisper numbers that were floated in the media but were never ‘leaked’ by the FOMC or announced in news conferences by the Fed Chairman (which are being held for the first time ever under Bernanke’s tenure).  In essence, the numbers 10 billion, 15 billion, mortgaged backed vs……. were not part of the essential 5 steps of Fed signaling one should expect before a complete shift in policy.  (I won’t explain them.)

Here’s 5 reasons why I believed the Fed would continue purchasing assets, known as Quantitative Easing or QE in September 2013:

  1. The Fed was exceptionally quiet – no Fed officials throwing out numbers.
  2. Ben Bernanke – didn’t leak numbers during a press conference.
  3. No press leaks of a confirmed number we all knew we should be working with via our ‘favorite sources’— this keeps markets in check.
  4. No real skepticism left unabated that a supposed taper would occur — everyone was thinking a taper was highly probable – thus making a virtual taper occur…. this is actually good Fed policy in action.
  5. Horrible economic data and lack of future credibility.  Anything above 6.5 percent unemployment, pegged by the Fed (for the first time ever) – underestimates the situation 5 years ago where risk aversion was necessary to induce. Non-farm payrolls were way below my estimate and the 6 month moving average.  The housing market was clobbered since the FOMC suggested tapering. I’ve even gone as far as to suggest the Fed may not taper this year and with the wrangling  in D.C., this  looks possible.  The President is more than willing to gamble on government shutdowns in what would otherwise be known as a depression if a generational demographic shift wasn’t unnaturally lowering the labor-force participation rate.  This has hampered growth for the last few years as Republican ‘posturing’ has worked to keep Mr. Obama from economically compromising on behalf of the — ‘the people’.  Political economy uncertainty is back to its highest-Obama levels again leading to speeches on the subject ……..just about anytime now………

That’s my shortlist.

I have been clear the economy doesn’t warrant a taper for several weeks – and on my social media assets….. @torycapital @celestinechukumba on Twitter, Stocktwits and on the Facebook Page.  And If you’ve been here before, you were well positioned.  Individual Fed decisions can be tricky but signaling rules shouldn’t change for some time to come.

s&p 500 after ben bernanke no taper decision 6 months september 18

The S&P 500 gapped up in the last 5 sessions twice without retreating, buyers had the advantage before the announcement.  If follow-through occurs the market could continue to go higher. It seems like institutions are setting up for a strong 2013 end which could make buying now advantageous on any weakness from hereon in until 2014.  Stay tuned for any changes in sentiment.

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