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

It was another mixed week for U.S. stocks. The Dow Jones Industrial Average fell for the second week in a row and the NASDAQ Composite was negative last week, but losses in both of these widely-followed indices were modest.  In fact, all major indexes posted multi-year highs at one point intra-day last week. The Russell 2000 Index of small-cap stocks was the standout performer (again) with a 1.03% gain on the week. This index is now up 8.69% year-to-date so far as compared to a gain of 6.57% for the S&P 500. The NASDAQ Composite Index is up 5.71% year-to-date. Traders, investors, and the financial media continued to focus on the steady stream of corporate earnings and domestic economic reports, European economic and political prospects, Chinese growth factors, Federal Reserve monetary policy pronouncements, and the potential ramifications of the “sequester” budget cut negotiations in Washington. None of these factors served as a meaningful catalyst for a major change in U.S. stock prices last week, but all were scrutinized carefully for any possible market moving consequences immediately ahead.

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   13,981.76     + 8.37          +0.06%           - 11.21         - 0.08%

S&P 500 Index                            1,519.79     -  1.59          - 0.20%           + 1.86         + 0.12%

NASDAQ Composite Index         3,192.03     -  6.63          - 0.21%           -  1.84         - 0.06%

Russell 2000 Index                         923.15     -  0.61          - 0.07%           +  9.48        +1.03%

Friday’s news from Wal-Mart (WMT) looked interesting to me as a potential “economic” report that may have staying power beyond a single trading day. My read of this situation was that an email from Wal-Mart’s vice president of finance and logistics was leaked to the financial press with obvious negative consequences to the Company’s stock price. This VP’s comments were as follows: “In case you haven’t seen a sales report these days, February MTD (month-to-date) sales are a total disaster, …the worst start to a month I have seen in my 7 years with the company.” If we review the 1-minute intra-day trading chart of Wal-Mart on Friday, it’s not hard to see that this news hit the marketplace at around 2:03 PM ET. Wal-Mart’s stock was trading around $69.80/share at that time and within minutes of the release of this news WMT stock plunged to a low of $68.13/share (-2.39%). To Wal-Mart’s credit, its investor relations team acted quickly to settle Wall Street’s nerves by releasing the following announcement: “As with any organization, we often see internal communications that are not entirely accurate, that lack the proper context and represent individual opinions.” Wal-Mart’s stock price then rebounded to close at $69.30/share, but that was still down $1.52/share (or -2.15%) on the day. Is Wal-Mart’s news the smoking gun that turns out to be a major catalyst in moving stocks? Perhaps the American consumer is feeling the effects of higher payroll taxes this year so far? Maybe all those “back loaded” corporate earnings estimates for 2013 are too optimistic in the face of potential economic headwinds like a weakened consumer?

For your review, I have attached the daily bar chart for the Russell 2000 Small-cap Index. This particular chart also has all the buy and sell signals from my computer-based trading system. You will quickly note that there are no sell signals as yet on the current uptrend which began on November 16^th, 2012. As it turns out, there are no sell signals as yet on the daily, weekly, or monthly charts for any major index except the Dow Jones Utility Average, where a monthly chart sell signal was triggered in August 2012. My bearish view of the U.S. stock market right now continues to assume that sell signals will be triggered very soon.

I've also included the Nasdaq-100 Weekly Bar Chart (symbol QQQ) as an example of a potential head & shoulders top formation. This actively traded index product has lagged most other major indices this year so far, and it is one of the few noteworthy technical "non-confirmations" of the record highs witnessed in several major averages over the last two weeks. Of course, Apple is a major component of this index, which may explain most of the Nasdaq-100's lagging performance.

  

Bottom Line: I remain negative on the U.S. Stock Market. While buyers of every intra-day dip have been rewarded on this latest up-leg that began on November 16^th, 2012, I sense elevated levels of confidence and complacency that may be unwarranted given potential threats to stock investors on the near-term horizon. Many of the technical indicators that I follow are “overbought” and most sentiment gauges reflect extreme levels of bullishness among often-wrong investor groups. Corporate insiders are selling their own shares at a near-record pace and Wall Street’s full-year 2013 earnings estimates from analysts appear too optimistic.



Russell 2000 Daily Bar Chart with Computer-based Buy & Sell Signals



Nasdaq 100 Index (QQQ) Weekly Bar Chart - Potential Head & Shoulders Top?

U.S. Stock Market - Less Than Convincing New Highs

The DJIA, DJUA, and NY Composite were all down modestly again today for the second straight day. However, the S&P 500 Index advanced to another 5-year recovery high, and the Dow Jones Transportation Average and the Russell 2000 Index both posted all-time record closing highs today. On the NYSE, advancing stocks outpaced declining stocks just barely, 1511 vs 1507, respectively. And T-bond and T-note prices rebounded nicely, which just added to investor confusion. If the economy is doing well, then why are Treasury bonds finding a strong bid again? If the economy is rolling over, then why are stocks at record highs?

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

Dow Jones Industrial Average            13,973.39        -  9.52              - 0.07%          

S&P 500 Index                                      1,521.38        + 1.05              +0.07%

NASDAQ Composite Index                   3,198.66        + 1.78              +0.06%

Russell 2000 Index                                   923.76        + 3.18              +0.35%           

Yesterday’s column was entitled “Broken Records”. While this reference was meant to describe the bullish price action in most major stock market averages, it could easily have described the message of this advisory over the last nine issues. My bearish message over this period sounded like a broken record, and today’s views are more of the same.

The Eurozone economy contracted by -0.6% in the 4^th quarter of 2012. Even Germany posted a decline in 4^th quarter GDP (at -0.6%). While it’s no big surprise to see renewed weakness in European economies, most economists expected better news this morning when this information was reported. Do we need to be concerned about European economic news? I think we always need to keep an eye on major trading partners, and this is no exception. Will this news provide headwinds for stocks? Maybe a little, but probably not enough to serve as THE catalyst for a meaningful correction in U.S. stocks. Is a so-called “stealth correction” possible? This is where sectors rotate into leadership one-by-one while others move sideways or face modest corrections before finding significant new bids again. I don’t think that will happen here. Instead, I continue to believe that a meaningful broad-based market correction is imminent and that this expected downturn will be steeper than most believe likely right now.

If timing is everything (which is probably true), then when will sellers began to dominate? There is a 3-day weekend immediately ahead, with a National Holiday on Monday. Trading could be a bit thin tomorrow as traders and investment managers get a head start on the holiday, but if the bulls aren’t in control by mid-morning, then anyone looking to lighten their long positions into the weekend might just find a dearth of bids.

A weekly chart sell signal was triggered at today's close in General Motors. GM used to be an important bellweather for the overall market. I think today's sell signal in GM was just another in a long list of warnings that there is trouble immediately ahead for stocks (see GM chart below).

Bottom Line: I would like to see a sell signal from my computer-based trading system in at least one of the major stock indexes before proclaiming the end-of-the-world, but at the same time I continue to believe the end is near and that there is almost no upside potential for U.S. stocks right here while downside risks abound. I think today’s rebound in Treasury bond prices was a bad omen for stocks as the U.S. economy slides into a “slow growth” or “no growth" phase after a 4-year recovery. My own view is that an actual recession, albeit a mild one, is on the not-to-distant horizon for the U.S; corporate profits will then disappoint, and stocks will get punished.



General Motors (GM) Weekly Bar Chart with Computer-based Buy & Sell Signals