The market action seen on the chart of the S&P 500 March futures contract clearly shows an ascending triangle breaking out to the upside. In English that means that the market, although grossly overbought, continues to head higher and higher. Is it a good time to invest, well obviously September was better and although valuations appear to be high, the alternative is the bond or money markets. As you are aware, an investment in the money market will actually cost you money. How? That is simple, you will pay tax on your paltry returns and thus once inflation, even the reported levels by our government, is added to the equation you will have a negative return. Faced with this dilemma, both investors and portfolio managers have decided that the better direction for their funds in the stock market. Remember also that dividends are a tax preference item. The next natural question would be when do you believe that mood will change? That again is an easy question to answer, given nothing exploding in the globe between here and there. Clearly when bond yields are higher than stock yields after deducting the tax owed on the interest payment, bonds will become a good alternative for those needing safety and yield.
We must add that the chart of the NASDAQ 100 March futures also has an ascending triangle but that triangle has not broken to the upside and actually is breaking below the uptrend line. This is index lead the rally to the upside but, of late, has been slowing down on its upside movement. While the S&P 500 rallied 0.36% in the Friday rally, the NASDAQ 100 rallied only 0.06%. Bottom line is that this is a mature rally and there will be bumps in the road therefore, we would advise keeping stops on your positions or hedge your positions with options. Just remember at the high of July 13 2007 the dividend yield of all dividend paying stocks in the Value Line universe was 1.6%. Today that dividend yield is 1.8% and we are miles away from the 4.0% yield seen at the market low on March 9, 2009. (This information is from “The Value Line Investment Survey” February 18, 2011 issue.
Although energy stocks and precious metal stocks have rallied significantly, we are bullish gold stocks and see some troubling divergences in silver. We like crude oil stocks but again they have rallied in the face of troubling riots in and around oil producing nations. That said, we would be buyers at more reasonable levels and not at these hysterical inflated prices. Remember that once the unrest in Egypt was over, the price of oil retreated to the $85 area which is a good indication of the commodities reaction to peace in that area of the globe.
Tuesday: February consumer confidence is released at 10:00.
Wednesday: January existing home sales are released at 10:00.
Thursday: January durable goods are released at 8:30, and January new home sales are released at 10:00.
Friday: 4th quarter GDP is released at 8:30, February Michigan sentiment is released at 9:45-10:00, Fed Vice Chairman Yellen speaks, and Richmond Fed President Lacker speaks.
The US Dollar index declined for three of the last five sessions last week. Should the market close below or trade below the 77.00 low, the door will be open to the 75-74 area. The 5-day moving average is at 78.287. The top of the Bollinger band is at 78.826 and the lower edge is seen at 77.286. All the indicators that we follow herein are issuing a continued sell-signal with plenty of room to the downside. The bottom line is this; the market must stay above 77.40 by next Friday or face a bear-raid. If, on the other hand, the US Dollar Index can rally and close above 78.45, by next Friday, the bulls will be back in control. Is there any wonder why commodities priced in US Dollar are in rally mode?
The S&P 500 March futures contract continued its rally in the Friday session closing up 0.36% on the day. The 5-day moving average is at 1333.45. The top of the Bollinger band is at 1348.73 and the lower edge is seen at 1271.51. The stochastic indicator, our own indicator and the RSI all continue to issue a buy-signal at very overbought levels. The Thomas DeMark Expert indicator is flat at slight above the neutral level. We are above the Ichimoku clouds for all time-frames. The market gave investors and portfolio managers one chance, in January, to invest in the market and then returned to its upward trajectory. Where will it end, we certainly do not know, nor do we know when this will end. That said we believe that the end will be signaled by competition from the bond market. The Market Profile chart tells us that should we close above 1340.90, which we did in the Friday session, that there is little in the way of overhead supply to keep this market from melting to the upside. This is confirmed by the Point and Figure chart of the S&P 500. We expect to see shallow dips and a continued surge to the upside until, this market becomes exhausted and tired.
The NASDAQ 100 futures contract left two doji like candles on the chart in both the Thursday and Friday session. As you know, a doji is a candle which indicates a possible transition or possible change in direction. Both the bulls and the bears are equally matched in these sessions and it is thought that because the bulls have had control for some time that this loss of control in the last two sessions is a sign of weakness or loss of thrust. Therefore, it is likely that we could see a brief retreat in this index. The 5-day moving average is at2388.65. The top of the Bollinger band is at 2418.00 and the lower edge is seen at 2266.34. The stochastic indicator is overbought, as it has been for almost the entire of February, and is not giving any signal at all. The Thomas DeMark Expert indicator is flat at neutral. Our own indicator is giving us a mini sell-signal and the RSI is flat at overbought levels. We are above the Ichimoku Clouds for all time-frames and we are overbought as measured by the stochastic indicator and the RSI for all time-frames. This tells us that some cautions should be warranted. Use stops of hedge your positions with options selling calls on your equity positions and perhaps buying the lower puts to buy some short-term protection.
The Russell 2000 rallied in the Friday session gaining 1.90 points or 0.23%. The 5-day moving average is at 827.36. The top of the Bollinger band is at 840.29 and the lower edge is seen at 767.41. The stochastic indicator is issuing a sell-signal that said, we would not take action on this signal because all sell-signals since the beginning of February have been wrong. The Thomas DeMark Expert indicator is going flat at neutral levels. The RSI is pointing slightly higher at overbought levels and our own indicator is about ready to issue a sell-signal. Our initial upside projection is 851. We would expect to see a retreat to 809 eventually. We are above the Ichimoku Clouds for all time-frames. The Market Profile chart warns us that above 835.25 there is little supply to keep this market from melting to the upside.
Crude oil is rallying not on economic expansion and but rather on global chaos in the oil rich regions of the globe. Should these countries become peaceful, naturally we will see crude oil retreat. Even though the rioting countries may not all be oil producing countries they border oil producing countries. The very thought of disruptions to the distribution of oil has sent the product higher. The market has rallied for the past three trading sessions. There is a downtrend line at 90.91 which should contain the market. Should we close above that level, we would expect to see the market return to 92.50 and higher. We are below the Ichimoku Clouds for the daily and the monthly time-frames but are above the clouds for the weekly time-frame. All the indicators that we follow are issuing a buy-signal with plenty of room to the upside. It would be important to watch this market’s reaction should peace return to area. We do not expect to see that anytime soon. We remain bullish on crude oil and unless 86.33 is removed and the market cannot close back above that level. Should we see the market close below 94.41, we will abandon the bullish stance.
Gold has enjoyed a rally taking the market back to 1388.60. The rally has been organized and seems to stay inside the upside channel. The lower end of the channel is at 1367.95 and the upper end of the channel is at 1399.93. The 5-day moving average is at 1377.34. The top of the Bollinger band is at 1391.21 and the lower edge is seen at 1316.23. We are inside the Ichimoku Clouds for the daily-time frame and above the clouds for both the weekly and the monthly time-frames. We would like to remind you that silver has made a new high and gold has not. It would appear that a bit of froth is in the silver market. We continue to like gold but certainly would not chase the market higher.