Friday, May 4, 2012

Buyers Beware: S&P 500 Issues Sell Signal

A lower-than-expected ADP employment report and a disappointing manufacturing PMI from the eurozone kept a lid on gains yesterday, despite a handful of better-than-expected earnings from several key stocks.
Banks led the list of decliners with Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) leading the sector lower. And commodities were hard hit with the CRB Commodity Index off 1.3%, its worst day in three weeks.
The Dow Jones Industrial Average lost 11 points, closing at 13,269, and the S&P 500 fell 4 points at 1,402, but the Nasdaq was up 9 points to close at 3,060. The NYSE traded 780 million shares and the Nasdaq crossed 461 million. Decliners were ahead of advancers on the Big Board by 1.3-to-1, but advancers were ahead of decliners on the Nasdaq by 1.2-to-1.
The stock market continues to struggle, and it is looking more like the major indices have settled into a “range top.” Michael Ashbaugh pointed this out yesterday, as he correctly noted that the overhead for the S&P 500 spans from 1,422 to 1,440, matching the top that triggered a crash in 2008. This doesn’t mean that a crash will occur again from this level, but I believe that it has slowed the advance enough that buyers are not yet ready to venture into that zone.
On Monday, we talked about the “non-confirmation” that exists between the Dow Jones Industrial Average and the Dow Jones Transportation Average — a serious impediment to a breakout. But another non-confirmation existed for several weeks between the S&P 500 and the other very broad-based index, the NYSE Composite. Yesterday, that non-confirmation was resolved.
SPX Chart
Click to EnlargeTrade of the Day Chart Key

The S&P 500 has been sluggish and range-bound; however, until now it had not issued a sell signal. But yesterday, when the 20-day moving average crossed (by a fraction) through the 50-day moving average, a “short-term sell” was confirmed. Also note that the short line (red) of the stochastic is moving lower — not a favorable sign.
NYSE Chart
Click to Enlarge

The NYSE Composite issued a sell signal 12 sessions ago when its 20-day moving average sliced through the 50-day. Now its stochastic is close to another sell signal as the index hovers above its 50-day moving average, its first line of support.
Conclusion: These technical sell signals between the NYSE Composite and the S&P 500 have been resolved with the crossing of the moving averages on the S&P 500. Thus far, signals have applied to the short term, but as they accumulate the intermediate zones come under pressure.
Therefore, there is little to be gained by going long at this level, and possibly much to be gained by aggressive short-term selling or just standing aside. Longer-term investors should keep a list of stocks to buy handy, but it could take several weeks or even months if the current patterns aren’t quickly resolved before buy signals are triggered.

This "lagging" sector predicted last year's market top

A year ago today, the S&P 500 hits its 2011 highs.  Basic Materials ETF (IYM) reflected weakness before the 500 hit its highs.  Looking back of the past one year, IYM is trailing/underperformed the S&P 500 by 20%.  Odds are pretty high that the S&P 500 needs this sector to break falling resistance, before an extended and quality upside move in the 500 is to take place.
Watch this lager right now, as it continues to create lower highs at a key falling resistance line/top of its flag pattern.  Weakness in IYM in early 2011 was a suggestion that investors should be cautious when constructing a portfolio....the message remains the same one year later!

Why U.S. House Prices Won't Recover

When will U.S. house prices recover? Likely never. But that's no reason not to buy.
The latest S&P / Case-Shiller numbers, reported last week, show that prices in 20 major markets declined 3.5% over the year through February. They're now back to 2002 levels. If we subtract for inflation, they're back to 1998 levels.
But consider: After subtracting for inflation, prices are also back to 1986 levels. And 1955 levels. And 1895 levels (see chart).
That's because the natural rate of price appreciation for houses is zero after inflation. Prices will eventually stop falling. They'll resume rising. But over the long term, they're unlikely to resume rising faster than inflation.
That's why prospective buyers should stop focusing on the vague hope that house prices will jump from here and focus instead on the functional value houses provide for the money. In most markets, they provide enough of that to make buying a good deal.
To see why house prices and inflation are linked, consider that inflation is a general rise in the price of consumable goods and services. We measure it as a nation just as you might think: pollsters collect prices on thousands of items and statisticians turn those prices into an index, called the Consumer Price Index.
The inflation rate over the year through March was 2.6%. Behind that number is a lot of variation; dairy products got 6.3% more expensive, while utility gas service got 9.1% cheaper.  (more)

Equities Fight to Hold Up While EU & US Data Give Mixed Signals

Investors and traders just can’t seem to catch a break when it comes to economic news. For example Tuesday in the United States we saw strong ISM manufacturing numbers which surprised the market. The numbers were way above expectations and it triggered a feeding frenzy in US based investments like stocks and the green back.
The following session Italy reported terrible PMI and unemployment rate numbers which took most of the wind out the European and US stocks. One day the data is great, next day it’s bad…
The strong numbers in the US have everyone including myself thinking that this week’s jobless claims (unemployment rate) will be down. If this is the case then we will see stocks jump along with the dollar, much like what we saw trader do last Tuesday which is what Jim Cramer says best – BUY BUY BUY.
Normally we do not see the dollar index rally along with stocks but if EU continues to show signs of weakness then it is very likely the dollar and equities inverse relationship could decouple. Reason being investors around the globe will focus their money on the more stable US investments like the dollar and US stocks.
You can learn how to trade economic news with my free Economic Indicator Trading Tool:    

The Dollar is Trading at a Major Tipping Point – Weekly Chart
The dollar index is something that I watch very closely on a daily basis. Focusing on the weekly and 8 hour charts I look for support and resistance levels along with price patterns.
As you can see from the weekly dollar chart below, a large bull flag has formed. This pattern typically means higher prices and in this case the price target is between the 86 and 88 level.

There are few wild cards to toss into the game on what will unfold next:
  1. Currency manipulation seems to be strong and if the US wants a low dollar value then it’s likely it will stay low. This bodes well for stocks and commodities.
  2. Depending on what happens and how things unfold in Euro-land the dollar/stock relationship could decouple meaning they could start to rise together. If we get neutral economic data out of the EU and positive data out of the US it will likely boost the value of stocks and the dollar. But strong negative data out of the EU will more than likely just sent the dollar higher and spooking investors and triggering a selloff in stock prices.
Dollar Index Investing

Dollar Index 4 Hour Chart
I find the dollar index to be a great trading tool in helping me time short term reversals in the equities market.  (more)

Starbucks About to Perk Up : SBUX

Starbucks Corp. (NASDAQ:SBUX) — The largest roaster and retailer of coffee in the world has a steady stream of earnings gains, and the stock has rewarded shareholders by almost doubling in the past year.
Earnings have improved each year since 2008, and this year the company reported earnings of 40 cents versus analysts’ estimates of 38 cents. It is estimated to earn $1.84 in 2012 versus $1.62 in 2011, and $2.25 in 2013.
But the stock market’s recent lethargy has taken a toll on the price of SBUX, dropping it from a high of $62. It is trading in a common bull market consolidation pattern called a “flag.” It gapped down through its first support at the 20-day moving average (green line) and the next support is at $56. But our buy under price is at its 50-day moving average now at around $54.50.
The intermediate target for SBUX is $62, but long-term investors should put Starbucks on their list of top stocks to buy as a long-term hold.
SBUX Chart
Click to Enlarge

McAlvany Weekly Commentary

Discretion Minus Rules Equals Uncertainty

A Look At This Week’s Show:
-The gold standard forced balanced rules and budgets
-We have been taught to fear deflation by those who control the money
-Egan Jones and the danger of telling the truth

Chart of the Day - Nike (NKE)

The "Chart of the Day" is Nike (NKE), which showed up on Wednesday's Barchart "All-Time High" list. Nike on Wednesday posted a new all-time high of $114.56 and closed up 2.68%. TrendSpotter just turned Long on Wednesday's upside breakout. Nike was last featured on "Chart of the Day" as of the Dec 9, 2011 close of $97.68. In recent news on the stock, Benchmark Co. on April 20 initiated coverage on Nike with a Buy and a target of $128. Janney Capital on April 13 initiated coverage on Nike with a Buy and a target of $127. Argus on April 3 reiterated its Buy rating on Nike and raised its target to $122, citing cost cutting, the company's dominant competitive position, and the company's growth opportunities in China. Nike, with a market cap of $51 billion, is one of the largest sellers of athletic footwear and athletic apparel in the world.