U.S. Stock Market - Postponing The Inevitable

Given yesterday’s thrashing, today’s recovery was nothing short of miraculous. Bullish stock market investors just seemed to have unlimited firepower, and single-day sell-offs like Monday are easily shrugged off. Monday’s Boston bombings could easily have triggered a tsunami wave of selling among stock investors, but instead buyers prevailed and the 4-year bull market seems back on track.

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

                                                                                    Tuesday’s Closing Prices                   

Dow Jones Industrial Average                       14,756.78        +157.58           +1.08%

S&P 500 Index                                                  1,574.57        +  22.21           +1.43%

NASDAQ Composite Index                               3,264.63        +  48.14           +1.50%

Russell 2000 Index                                               923.30        +  16.12           +1.78%

Dow Jones Transportation Average                  6,041.34        +131.48           +2.22%

After record single-day absolute price declines on Monday, Gold and Silver attempted a form of “dead cat bounce” today; emphasis on “dead cat”. Many Gold/Silver mining shares actually finished down on the day despite decent rebounds in each of the underlying precious metals. It’s not hard to guess that there will be more than a few downgrades in this sector by many analysts who have perfect vision in their rear view mirrors. However, credit should be given to SoGen, Deutsche Bank, and Goldman Sachs who all made great calls early last week with their bearish turns on gold. While the only way to describe my view of this market is “long and wrong”, I remain convinced that the next 25% swing in precious metals prices will be to the upside. Computer-generated sell signals have now been triggered on the daily, weekly, and monthly charts in the U.S. Dollar Index. Can a sustained advance in precious metals price be far behind?

Bottom Line: In the U.S. stock market, I don’t see much upside follow-through potential to today’s recovery. The nightmare in Boston added just one more element of negativity to an already fragile marketplace. The collapse in Gold/Silver prices could easily be viewed as a bearish liquidity measure for stocks. The general plunge in commodity prices over the last couple of days has a distinct deflationary message behind it, and that message is not favorable to general equity prices. Three months from now, when the S&P 500 Index is 10% to 20% lower, many will look back at these mid-April highs and point to the “obvious” signals of an important turning point.

U.S. Stock Market - April 12th Week In Review

Lots of record highs were posted this past week among major U.S. stock market averages The S&P 500 Index posted a record intra-day high at 1.597.35 and a record closing high at 1,593.35 on Thursday, April 11^th. The Dow Jones Industrial Average posted a record intra-day high at 14,887.51 and a record closing high at 14,865.14 on the same day (4/11). The NASDAQ Composite Index posted a new “reaction” high at 3,306.95 on Thursday which is up 161% from its March 2009 low, but still 35% below its all-time high at 5,132.52 set in March 2000 in the “Dot Com” bubble. Other major indexes like the Russell 2000 and the Dow Jones Transportation Average failed to post record highs last week, but they are both very close and can not be considered so-called bearish non-confirmations.

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

DJ Industrial Average               14,865.06       -  0.08     -0.00%        +299.81           +2.06%

S&P 500 Index                           1,553.30       -  4.50      -0.28%        +  35.55           +2.29%

NASDAQ Comp.                        3,294.95       -  5.20      -0.16%        +  91.10           +2.84%

Russell 2000 Index                       942.85       -  4.20      -0.44%        +  19.55           +2.12%

DJ Trans. Average                     6,143.75       -21.11      - 0.34%       +106.39           +1.76%

The latest investor sentiment indicators are mixed. As reported in Barron’s this weekend, the Consensus and Market Vane weekly surveys show 77% and 65% bullish, respectively, on the U.S. stock market. The odd man out is the latest weekly AAII survey which shows only 19.3% of individual investors are bullish while an incredible 54.5% are outright bearish. This latest AAII survey is extremely puzzling to me, but probably shouldn’t be ignored in any market assessment.

Gold/Silver? Friday’s collapse in the precious metals futures, ETF’s, and related mining shares came as a complete surprise to me. The U.S. Dollar Index was mixed against most major currencies on Friday, so we can’t blame the plunge in gold/silver prices on strength in the Dollar. Sure, Cyprus is expected to be a seller of a relatively minor amount of gold from its reserves to fund its recent bailout agreement with the EU/IMF. And yes, India has imposed stiff import tariffs on the yellow metal which has curtailed demand there. However, the long lists of positives for Gold/Silver (central bank purchases by China & Russia, among others, and record “debasement” of currencies through debt monetization programs in Japan and the U.S., among others) clearly support precious metals prices. To explain Friday’s panic selling in Gold/Silver (GLD and SLV down about 5% on the day), we can probably look at hedge fund [forced] liquidations, margin calls, and a major breakdown in all technical chart support. While I view Friday’s collapse as “climactic” and part of a terminal “washout” of weak longs which will inevitably be followed by a V-shaped rally, no one can say for sure when that rebound will begin in earnest. For my managed accounts, I bought Gold/Silver mining stocks on Thursday and then added to these positions on Friday. Needless to say probably, my timing was less than ideal, but I still believe there is a major advance coming in this market.

Bottom Line: In recent columns here, I have been looking forward to a potential peak in the S&P 500 Index on Monday, April 15^th. While I remain convinced that a major correction in the U.S. stock market is imminent, the timing of this actual peak remains illusive. I would like to see early strength this coming week (and maybe even new record highs in both the SPX and the DJIA) followed by a key intra-day reversal to the downside before sinking my teeth into any meaningful short positions.