U.S. Stock Market - New Highs

Most major U.S. stock market averages recorded solid gains today, with some even posting all-time highs (i.e. Russell 2000 Index and the Dow Jones Transportation Average). The S&P 500 Index and the Dow Jones Industrial Average both advanced to 5-year highs. Increased M&A activity, ongoing positive corporate earnings reports, and a general feeling among investors that global recession fears may have been overblown were factors supporting share prices today.

Here are today’s closing marks, with changes from Friday’s close (Monday was a U.S. Holiday):

                                                                                    Tuesday’s Changes                  

Dow Jones Industrial Average                     14,035.67          +53.91             +0.39%           

S&P 500 Index                                                1,530.94          +11.15             +0.73%           

NASDAQ Composite Index                             3,213.59          +21.56             +0.68%           

Russell 2000 Index                                            932.00          +  8.85             +0.96%                       

For your review, I have attached the latest daily chart of the Russell 2000 Index. This index is now up 9.71% year-to-date so far in 2013. The S&P 500 Index is now up 7.34% year-to-date so far in 2013. Please note, that no sell signal has been generated by my computer-based trading system for the Russell 2000 Index or the S&P 500 Index since a buy signal was triggered in both these indexes on November 16^th. The Russell 2000 Index is up an incredible 22.06% since its intra-day low as posted on that day.

Most sectors of the market were “in sync” with the major market averages on the upside today. While homebuilders and mining shares were noteworthy exceptions here, the overall market was persistent on the upside and looked relatively strong all day.

It may be worth mentioning that if investors had been on the sidelines since the close on February 1^st, they would have missed a 1.17% advance in the S&P 500 Index, a 1.08% increase in the NASDAQ Composite, and a paltry 0.18% gain on the Dow Jones Industrial Average. Today’s market rally represented most of the total gain that was posted over the last 19 days. The key question for investors today is whether or not there will be enough upside potential from here to justify buying stocks now? Perhaps another question that might need to be addressed is the character of the next potential stock market correction? Will there be time to get out of long stock positions before sellers begin to dominate? And what are the chances of an overnight downside gap (triggered by some sort of Black Swan event)?

Bottom Line: While today’s price action in most U.S. stocks was positive, I don’t believe the potential rewards of further upside activity justify the potential risks now facing investors for a significant correction immediately ahead. While “sideline cash” earns almost nothing right now with short-term interest rates near zero, this may actually be the best option for conservative investors. More aggressive investors may find value in beaten down mining shares (especially among precious metals stocks), but investments in that sector are clearly speculative.

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

U.S. Stock Market - Weekend Supplement

Rather than updating my usual “Week In Review” column as attached below with additional information, I have decided to issue this special supplement.

Much has been made of the record cash pouring into stock mutual funds this year. January’s $55 billion was the largest one-month inflow since February 2000. However, the rush to buy stocks has cooled a bit recently, and I think these latest numbers from Thomson Reuters’ Lipper division are noteworthy.

Mutual funds that focus on international stocks attracted more than $3 billion in the week ended February 13^th, but mutual funds that focus on U.S. stocks saw redemptions of $617.5 million, their first weekly outflow of the new year so far. Investors also pulled $1.8 billion from stock exchange-traded-funds (ETFs) last week. The biggest ETF of them all, the SPDR S&P 500 ETF (symbol SPY) saw redemptions of $2.3 billion last week, the second week in a row of outflows from this popular stock ETF.  Also noteworthy to me from this latest Lipper report was that Bond mutual funds attracted $2.9 billion of new cash last week.

Just for review, 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%

Also, for your review, I have attached the latest Nasdaq-100 Weekly Bar Chart (symbol QQQ) as a prime 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 other major averages over the last two weeks. Of course, Apple is the largest component of this index, which may explain much of the Nasdaq-100's lagging performance.

Bottom Line: The fuel for the current advance in U.S. stock prices (i.e. cash inflows to stock funds) is exhausted and there are now even signs of deterioration in key stock market technicals. Early signs of renewed weakness in domestic economic fundamentals can be found in the leaked internal report from Wal-Mart this past Friday showing early February retail sales as a total “disaster”. U.S. equity prices are vulnerable to a meaningful correction which could start at any moment. My own view is that Republicans in Washington will refuse to compromise on so-called “sequester” spending cuts that automatically kick-in on March 1^st. While I think U.S. stock prices will roll-over before Congress returns February 25^th from its winter break, negotiations between the White House and Congress to halt or diminished the automatic spending cuts will probably be nasty and without significant progress even as the March 1^st deadline passes.

Nasdaq-100 Weekly Bar Chart - Possible Head & Shoulders Top Formation?