Finally, after 8-strong positive weeks for the S&P 500 we began to see signs of distribution, especially in overseas markets. As you know by now, from my point of view, the primary two catalysts that sent stocks higher in recent months are: The Global Stability Put (GSP, the latest buzz word from Davos) and an improving global economy. Both of these catalysts were questioned last week: first by the minutes from the US Fed which showed that stimulus might end sooner rather than later and a slew of weaker than expected economic data reports were released. We have been saying for weeks that stocks were overdue for a pullback and our job right now is to analyze the health of this pullback. Ideally, we would see the major averages pull back on light volume into their prior 2012 chart highs or their respective 50 DMA lines. The uptrend that began on Friday, November 16, 2012- (after politicians hinted that a deal would get done for the fiscal cliff) remains intact and offers an interesting lesson for investors- stocks are closely paying attention to government officials (Since the 2009 low, every major rally was sparked by government action). Therefore it is very important to pay very close attention to central banks and government action until their policies change.
Monday-Wednesday’s Action: Markets Pullback
Thursday & Friday’s Action: Distribution
Stocks fell on Thursday as investors digested a slew of mixed economic data. The big miss came from the Philly Fed index which fell to -12.5 in February from -5.8 in January. Existing home sales rose by +0.4% to a seasonally adjusted rate of 4.92M which matched estimates. The bullish part of the report was that the supply of new homes plunged to the lowest level since December 1999. The Conference Board said its leading economic index rose to +0.2% to 94.1 in January which missed the Street’s expectation for a gain of +0.3%. The Labor Department said weekly jobless claims rose 20k to 362k which topped the Street’s estimate for 355k. The consumer price index allayed inflation woes and was flat for a second consecutive month. Stocks bounced on Friday but volume, a critical component of institutional demand, was lighter which is not a healthy.
Market Outlook: Uptrend Under Pressure
From our perspective, the market rally is under pressure as the major averages pullback towards support. As always, it is extremely important to be flexible in your approach and change when the facts change (Thank you Mr. Keynes). For those of you that are new to our work, on October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19. Immediately after that note was published, stocks fell sharply and a lot of technical damage occurred. Then we put out a note on Friday, November 16, 2012 (the exact low for this move) titled, “Time For A Bounce” and the rest is history. Most recently, on Wednesday, February 20, 2013 we sent out a note saying, “Time For A Pullback.” Stay tuned as we will continue to keep you in sync with the market and ahead of the crowd. As always, keep your losses small and never argue with the tape.