Is a Major Stock Market Correction Coming?

As the U.S. economy continues to show signs of improvement, Greece weighs down the world and threatens significant problems that could reverberate around the globe. “Big Ben” Bernanke of the Federal Reserve and “Super Mario” Draghi of the European Central Bank continue to pump enormous amounts of liquidity and “free money” into global financial systems in an attempt to keep markets afloat, but like the epic struggle between the Titanic and the iceberg, the current situation looks more and more like the iceberg is winning.

And while the fundamentals are troubling, to say the least, the technical indicators are positively terrifying.

Click to EnlargeIn this chart of the movements of the S&P 500 (at right, courtesy of www.stockcharts.com), we see a graphic display of the overbought condition of the RSI (relative strength indicator). The RSI is now well above 70, which is widely viewed as the “red zone.” We can see how the S&P 500 has reacted with measurable declines at previous points in history when the RSI was at levels similar to those of today. Furthermore, the index is currently at significant resistance, a level that adds additional weight to the thesis that a major correction could be just around the corner.

Click to EnlargeA quick glance at the VIX (at right, chart courtesy of www.stockcharts.com), the CBOE “fear indicator” shows complacency running high — so high, in fact, that the VIX is now reaching multiyear lows that have not been penetrated since back in the good ol’ days of 2007, which seems like almost a lifetime ago.

A look at RSI shows us that the VIX is very oversold and therefore ready for at least a short-term rebound to higher prices of the indicator.

The significance of the VIX is that declining readings in the VIX typically portend higher stock prices, while rising readings typically precede lower stock prices. With the VIX at multiyear support levels and highly oversold, the possibility of a directional reversal is high.

Putting the two charts together, one can only come to the conclusion that a significant and measurable stock market correction is probably imminent. Of course, timing it tricky, but somewhere in the near future one could expect such a correction to occur.

For ETF investors, now could be a good time to pick up some protection via put options on positions you want to keep, moving a portion of your assets to cash or even deploying a couple of strategic inverse exchange-traded funds if you’re an aggressive investor.

At Wall Street Sector Selector[1], we are currently positioned in cash in anticipation of a change in market direction. With Greece in doubt and Portugal right behind it, fundamentals also support the probability of lower ETF equity prices ahead. It’s unlikely, though possible, that we’re heading for another brutal bear market.

If this is just a normal correction, then over the next few weeks we could see some excellent buying opportunities. If it’s something more than a garden-variety correction, defensive moves now could position an investor to take advantage of the opportunities that will emerge should the bear raise its fearsome head again.

Traders: Take Your AKAM Profits and Run

Akamai Technologies (NASDAQ:AKAM) – The last time I reviewed this developer of solutions designed to accelerate and improve the delivery of internet content was on Oct. 31, 2011. I said, “Technically the stock has broken above a significant resistance line at $25 on a break-away-gap, a very bullish sign. Traders will want to jump on AKAM for a quick pop to its 200-day moving average at $32.”

The ”pop” to $32 occurred in late December, and shortly after that the stock flashed a Golden Cross, confirming that a longer-term move was possible.

Yesterday, AKAM reported fourth-quarter earnings of 45 cents per share, trouncing analysts’ estimates of 40 cents, and revenues were up 15%, well ahead of Street estimates. The stock sold north of $37 in after-hours trading yesterday. Longer-term investors may wish to hang onto their AKAM shares, but traders should recognize the pocket of resistance at $35 to $43 and the open gap at $35.50 to $40. These gaps, when associated with resistance zones, often are areas to target for profit-taking. A pop this morning into that zone might reward the seller with a pullback into the low $30s and another opportunity to buy.

BULLISH SENTIMENT SURGES

Bullish sentiment jumped to its highest level since January 13, 2011, in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, reached 51.6%. The 7.8-percentage-point increase drove optimism to an unusually high level, but not an extraordinarily high level. Bullish sentiment is now above its historical average of 39% for eight out of the past nine weeks.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, declined 2.9 percentage points to 28.2%. This is just the second time in six weeks that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 4.9 percentage points to 20.2%. This the seventh time in the past eight weeks that bearish sentiment has been below its historical average of 30%.

Bullish sentiment is now more than one standard deviation above its historical average, placing it above the typical range that has been registered over the course of the survey. The difference between bullish and bearish sentiment (the bull-bear spread) is also unusually high at 31.5%, but not so high as to create caution that individual investors are too optimistic.

Driving the bullish sentiment is the belief that both the economy and corporate earnings are improving. Europe’s sovereign debt problems and slow domestic economic growth still concern many individual investors, however.

This week’s special question asked AAII members for their thoughts on Facebook’s initial public offering (IPO) and whether they will consider buying shares of the stock. The overwhelming majority of respondents said they wouldn’t invest in Facebook, especially during or right after the IPO. Many think there is already too much excitement for the offering. Others were worried that the company is a fad or said that they didn’t fully understand the industry.

Here is a sampling of the responses:

• “I will pass. When so many people are excited, the best thing to do is turn away.”
• “Many are buying shares on the basis of pure speculation. At a P/E of 150, the prudent investor would wait.”
• “The IPO will be in great demand, so I would expect the initial trading to be characterized by irrational exuberance.”
• “I wouldn’t touch that IPO with a ten-foot pole.”
• “I will buy it. It’s Google (GOOG) all over, with no one knowing how they’ll make money yet the company will continue to grow.”

This week’s AAII Sentiment Survey results:

• Bullish: 51.6%, up 7.8 percentage points
• Neutral: 28.2%, down 2.9 percentage points
• Bearish: 20.2%, down 4.9 percentage points

Historical averages:

• Bullish: 39%
• Neutral: 31%
• Bearish: 30%

Why Are Canadians Whining About Pensions (Kolivakis)

Bill Curry of the Globe and Mail reports, Ottawa looks abroad for OAS pension solutions:

The Conservative government is looking abroad to find the best way to phase in a higher qualifying age for Old Age Security.

Human Resources Minister Diane Finley argued Sunday that Canada is one of the only countries in the 34-member Organization for Economic Co-operation and Development that isn’t already raising their retirement age.

Ms. Finley was asked directly on CTV’s Question Period whether the government’s plans would see Canadians having to wait until age 67 – rather than the current 65 – in order to qualify for Old Age Security.

“That’s one option. But let’s look at it. It used to be people were expected to have a life expectancy [of] between 68 and 71. Now it’s 81, and they’re still expecting to retire at the same age,” Ms. Finley said. “Almost all of the other countries in the OECD have already moved in this direction. The U.S. started doing this a little close to 20 years ago.”

Ms. Finley, 54, continued the government’s practice of offering hints at the government’s pension reform plans without specifically spelling out when the change would take effect or what it will involve. (more)

Ben Davies: Fair Value on Gold Today is Over $4,000

from King World News:

In an exclusive interview with King World News, Ben Davies told KWN the fair value of gold today is over $4,000. Ben Davies, CEO of Hinde Capital, also said the public is now starting to enter the gold market. Here is what Davies had to say: “The theme I had last time we were talking, ‘This was to be the year of defaults.’ I spoke specifically about a (coming) risk asset rally. One thing that was very evident to me, at the end of last quarter, from my trip to Asia and in conversations I had with fund managers here in Europe and the UK, it was very evident a lot of people had moved to cash.”

Ben Davies continues: Read More @ KingWorldNews.com

The Play On U.S. Energy Independence : BP, CLR, EOG, PXP

BP (NYSE:BP) just released its long-term energy outlook which suggests carbon emissions will increase by 28% by 2030. Along with that, renewable energy sources such as wind and solar will still only consist of less than 10% of the global energy output, even with increasing use in recent years. Accelerated emerging market growth especially from China and Brazil, leading to a 39% increase in global energy demand by 2030, will require a lot more imported foreign oil. China alone is forecasted to import 80% of its oil needs in the next 20 years. Europe will need to import 94% of its oil and 80% of its natural gas.

Energy Independence
The report goes on further, predicting that the United States could become energy independent during the same time period. Natural gas production is expected to rise from recent innovations in the gas field, known as fracking. The Keystone XL Pipeline, which would have delivered 700,000 barrels of oil per day from Canada to the U.S. refineries in the Gulf, has been delayed but another route is expected to be accepted. According to the U.S. Department of Energy, natural gas production has increased 11% from 2007 to 2010 and domestic crude oil production has increased to 5.7 million barrels per day, the highest it's been in eight years. Going back to natural gas, BP predicts that it will be the fastest growing fossil fuel by 2030, growing at 2.1% per year.

World Demand
Population and income will remain the key drivers of energy demand. The last 20 years saw the world population increase by 1.6 billion people, with population growth growing by 1.4 billion over the next 20 years. This rising demand is expected to be met by increased supply primarily from the Organization of Petroleum Exporting Countries (OPEC). Non-OPEC supply will also be expected to rise, with supply from the Americas expanding by 8 million barrels per day (Mb/d) as advances in drilling technologies, such as fracking, unlock resources in the Canadian oil sands (2 Mb/d), and U.S. shale oil (2.2 Mb/d). Shale gas and coal bed methane (CBM) will account for 63% of North American production by 2030.

Domestic Supply
Eagle Ford
With oil reserves estimated to be at 3 billion barrels, the Eagle Ford shale is expected to help make the U.S. the largest oil producer in the world. Investors wanting to invest in U.S. Energy Independence should look at Plains Exploration (NYSE:PXP), and EOG Resources (NYSE:EOG), two up-and-coming producers in the Eagle Shale. Plains Exploration currently produces 10,000 barrels of oil per day, with plans to increase production to 30,000 barrels of oil equivalent (BOE) per day by 2015. EOG Resources currently produces 53,000 BOE per day, 78% of that total comes from the Eagle Ford shale. (Before jumping into this hot sector, learn how these companies make their money.

Bakken Formation
Another huge shale is the Bakken Formation, found in the western U.S. Continental Resources Incorporated (NYSE:CLR) is the largest producer in this shale. Although it should be taken with a grain of salt, the CEO was on record stating that "the Bakken is the biggest hydrocarbon find in years ... basically doubles U.S. hydrocarbon reserves."

Oil Sands
Canada has the second highest oil reserves only to Saudi Arabia. With the growing demand for oil, the oil sands will supply an increasing amount to the U.S. Suncor (NYSE:SU) just reported its fourth quarter 2011 earnings and made $1.43 billion in net earnings. Cash flow from operations was $2.65 billion. With this amount of free cash flow it allows the company to make strategic moves in the oil sands sector. Its daily production is nothing to scoff at with 576,500 BOE/d in the fourth quarter. Its valuation to its peers looks cheap with a 13 P/E and a PEG ratio of 0.5. Looking forward, it's even better with a 9.2 forward P/E. Investors might want to take a look.

The Bottom Line
As emerging economies increase their energy use, and the U.S. becomes more energy independent, investors should look to North American operations for exposure to the oil and gas.

Chart of the Day - Whole Foods Market (WFM)

The "Chart of the Day" is Whole Foods Market (WFM), which showed up on Wednesday's Barchart "All Time High" list. Whole Foods on Wednesday posted a new all-time high of $78.31 and closed up 2.81%. TrendSpotter has been Long since Jan 4 at 71.49. Whole Foods was last featured on "Chart of the Day" on Sep 15 at $68.50. Whole Foods on Wednesday reported fiscal Q1 earnings of 65 cents, higher than the consensus of 61 cents, and said that sales momentum continues to be broad-based across regions. Whole Foods, with a market cap of $13.7 billion, is the largest purveyor of natural foods in the world.

Natural gas price up on production cuts

The price of natural gas jumped Thursday after a major producer said it is aggressively cutting production.

Chesapeake Energy Corp. told investors its production cuts are "actually higher" than the minimum of 500 million cubic feet per day it announced in January.

Investor relations chief Jeffrey Mobley said at an energy conference in Colorado that the company will push many of its natural gas operations to the sidelines until "what is hopefully a higher gas price environment" in the future. If prices remain weak, Chesapeake may limit natural gas production by up to a billion cubic feet per day.

Natural gas futures rose by 3 cents, or 1.2 percent, to finish at $2.48 per 1,000 cubic feet in New York. Prices surged by more than 5 percent earlier in the day after Mobley suggested that Chesapeake was increasing the production cuts beyond what was previously announced in January. The company clarified the statement later in the day.

Analysts said Thursday's announcement by Chesapeake shows that energy companies are watching the market closely and will aggressively manage supplies to push prices higher.

"Perhaps this won't be the end," PFGBest analyst Phil Flynn said. "If prices stay low, maybe they'll drop production even more."

The government reported earlier in the day that natural gas supplies fell last week by 78 billion cubic feet. That was less than analysts expected, and supply levels remain nearly 33 percent higher than the five-year average.

Meanwhile, benchmark crude prices rose by $1.13 to end at $99.84 per barrel in New York. Brent crude rose by $1.39 to finish $118.59 per barrel in London. Prices increased after Greece agreed on new spending cuts and other austerity measures that were necessary to receive an international bailout. The deal eased concerns of bank failures that could impact Europe's economy and reduce petroleum demand.

The U.S. also reported that the number of people seeking unemployment benefits fell to near a four-year low last week, suggesting that the job market is gaining strength. Energy demand tends to rise as the economy creates jobs and more people enter the daily commute.

Retail gasoline prices rose by less than a penny to a national average of $3.49 per 1,000 cubic feet, according to AAA, Wright Express and Oil Price Information Service. A gallon of regular is about 12 cents higher than it was a month ago and 37 cents higher than a year ago.

In other energy trading, heating oil rose 2 cents to end at $3.21 per gallon and gasoline futures rose by 4 cents to finish at $3.01 per gallon.