U.S. Stock Market - Broken Records

Except for the DJIA, DJUA, and NY Composite, which were all down slightly, every other major index advanced today. Record highs were broken in some, and almost every index posted a recovery high at least intra-day. However, with an hour to go in the regular trading session, most major indices were actually in negative territory on the day. If the market had closed at that moment, sell signals would have been triggered across-the-board in my computer trading system. Buyers seemed to appear out of nowhere late in the day (again), and another positive day was posted.

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

Dow Jones Industrial Average             13,982.91        - 35.79             -0.26%           

S&P 500 Index                                      1,520.33        +  0.90             +0.06%

NASDAQ Composite Index                   3,196.88        +10.38             +0.33%

Russell 2000 Index                                   920.58        +  3.06             +0.33%           

Price action so far this year looks very much like the start of 2011 and 2012. In 2011, after a very strong start, there was a minor correction that began in mid-February, but new reaction highs were soon posted until the real top in early May that year. In 2012, the stock market rallied for three straight months to start the new year with no meaningful correction and then topped out in early April. Maybe this year will be like 2012, with no correction until April. Or maybe this year will have a minor mid-February correction just like in 2011 before the rally resumes to new record highs. No one can say for sure, but I remain convinced that a mid-February high will be followed by a correction of at least 10%.

Bottom Line: Without a negative catalyst, the bulls are in control and the current advance seems to represent the path of least resistance. It’s not hard to imagine a dozen different potential negative catalysts which could derail this rally and trigger a meaningful correction. However, I don’t think the bulls are worried about any one of those dozen potential catalysts (at least the ones we can imagine). And maybe that’s the right attitude and also the right stance (to be fully invested)? The bearish case right now may be more about the potential vulnerability of the market (with so many fully invested) to potential negative catalysts that we can’t see (i.e. the so-called “Black Swan” event). On February 1^st, the Dow Jones Industrial Average closed at 14,009.79, its first time above 14,000 in more than 5 years. Today, the DJIA closed at 13,982.91. Hard to believe this closely-watched market barometer is actually down over the last 12 days, but it’s true. Most other major indices have done better, but not by much. The S&P 500 Index is up only 0.47% over the same period. The Risk/Reward ratio in owning stocks just doesn’t look favorable to me.

U.S. Stock Market - Another Record High for the Russell 2000 Index

The Russell 2000 Index of Small-Cap stocks posted another record high today and the Dow Jones Industrial Average finally cleared 14,000 again after six trading days of sideways trade. On the surface, today’s price action favored the bulls, but modest declines in the NASDAQ Composite and the Dow Jones Transportation Average may have kept enough investors guessing to prevent a full-fledged bullish stampede. Weakness in the NASDAQ Composite Index can be traced in part to sharp declines in Apple (-2.51%) and Facebook (-3.15%).

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

Dow Jones Industrial Average            14,018.70        +47.46             +0.34%           

S&P 500 Index                                      1,519.43        +  2.42             +0.16%

NASDAQ Composite Index                   3,186.49        -   5.51             - 0.17%

Russell 2000 Index                                   917.52        +  4.49             +0.49%           

I’ve included a chart of the Russell 2000 below for your review today. This index is up 20.16% since its mid-November low as compared to a gain of 13.11% for the S&P 500 Index over the same period. For any investment manager who was not fully invested over the last 12 weeks, they have to play “catch-up” now without the luxury of any meaningful corrections. Given all the negative news on the so-called “fiscal cliff” in November and December, I would not be surprised if more than 90% of domestic equities investment managers are behind their benchmarks over the last 3-month period.

Even though I have yet to see a sell signal for any major index within my computer-based trading system, my overall view is still negative on the U.S. Stock Market. This next note is a late addition to today's column. In a research report just issued by BofAML, as picked up and distributed by zerohedge.com, the BAML Bull & Bear Sentiment Index (which is considered a contrary indicator) is now at +9.6 (where +10.0 is the maximum possible value). Apparently, this +9.6 reading is higher than 99% of all readings since the inception of this index in 2002. According to BAML any reading above +8.0 is considered a sell signal for the stock market. Furthermore, when readings of +8.0 or higher have been recorded, the average peak-to-trough correction was 12% within three months.

While I remain negative on the broader stock market, actual computer buy signals were triggered today in several ETF trading products within the beaten-down precious metals arena. Specifically, daily chart buy signals were triggered at today’s close in the Silver ETF (symbol SLV) and also the Gold Miners ETF (symbol GDX). For your review I have included the chart of the Silver ETF below, with all computer-based buy and sell signals. Silver peaked in April 2011, and gold peaked in September 2011, and both have traded sideways to lower in a consolidation pattern since then. Many gold and silver mining stocks have been crushed during this period as managements faced higher operating costs, increased environmental regulation, and even political risks involving potential threats of nationalization. However, this sector looks “sold out” to me now, and today’s buy signals within my computer-based trading system suggest that the time may be right for aggressive investors to commit at least a small allocation to the long side in this unloved (and probably under-weighted) group.

Bottom Line: I think the U.S. Stock Market continues to look vulnerable to a major correction. I would like to see a trading day where morning strength is followed by a significant downside reversal to confirm the beginning of a meaningful downturn. In a special situation, out-of-favor Gold/Silver mining shares may have posted significant trading lows today, and they finally look ready for a sustained advance.

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

Silver ETF (symbol SLV) with Computer-based Buy & Sell Signals