New Stock Market Highs while Breadth Narrows
The S&P cleared the 1150 resistance level this week, putting an end to the “bifurcated” condition we discussed last week.
New yearly highs have been reached on all major indexes and Dow Theory triggered a new “buy” signal which was good news, but at the same time, new weakness showed up in the small caps which is usually the leading indicator of coming attractions.
Our portfolio made gains this week and our unrealized gains currently look like this:
Pos#1: +4.7%
Pos#2: +7.5%
Pos#3: +7.6%
Pos#4: +7.7%
Pos#5 : +7.0%
These were all entered on February 24th and with the exception of #1, have outperformed the S&P over the same period.
Clearing 1150 on the S&P was a big deal and the next target for significant resistance is 1200. But things aren’t as rosy as they seem if one drills a little deeper to see what’s going on beneath the surface.
Looking At My Screens
By any measure, the general indexes and most sectors have been in a dynamic uptrend in the face of mixed economic news. Today virtually every index stands at overbought levels, and as always, the chart tells the story:
Chart courtesy of stockcharts.com
In this chart we see the S&P well above its 50 and 200 Day Moving Averages and the MACD on an uptrend but with significant weakening over the course of the last couple of days as the rally stalled over the last two weeks.
You can see the RSI coming out of overbought levels of 70 and so it’s possible we could see a reversion to the mean on that indicator in the near future.
Chart courtesy of stockcharts.com
In the Advance/Decline line chart we see things rolling over this week and the MACD flattening, as well, which points to underlying weakness in the broader market in spite of what we see in the general indexes.
The View from 35,000 Feet
News was mixed this week as India checked in with a surprise rate increase and analysts predicted that the next rate hike could come as early as next month. Inflation appears to be picking up more rapidly in Asia as prices rose 2.7% year over year in China and the dragon’s industrial production expanded more than 20% in the first two months of the year thus far.
Conversely here at home, the Philly Fed report expanded slightly from February but remains well below the December high and housing starts, building permits, producer prices and leading economic indicators all reported declines this week.
Unemployment claims declined for the week while continuing claims expanded, signaling that layoffs are leveling off but that hiring or recalls have not begun in earnest.
Oil declined as U.S. demand dropped the week of March 12th and stands approximately -7% below the average for this time of year.
And overseas, the Greek Tragedy continues to unfold with the next act playing out this week in Brussels when EU Finance Ministers meet in Brussels on Thursday and Friday to discuss their intervention or lack thereof. Discussions will center on whether or not they’ll be coming to the IMF (led by the United States) for help or if the EU will take care of their own housekeeping.
Four more banks failed this week to bring the yearly total to 37 and on Sunday ObamaCare faces a final thumbs up or down for this $940 Billion package to be funded by who knows whom.
Looking to real estate which remains a key in any recovery and a weak sister thus far, my friend Cliff Wachtel from avafx.com reports that a new mortgage storm could be brewing starting in July. The numbers of variable interest rate mortgages due to reset in 2010-11 will climb to levels comparable to the 2007-2008 period which, as we all remember, wasn’t a happy time for most investors in the stock market.
What It All Means
The economy remains weak at home and stronger in Asia. We remain in a deflationary environment of weak demand and the markets are vastly overbought. A correction here could certainly be possible. Going forward, a growing number of noted analysts see the growing potential for a double dip recession and this is more than scary as we would be entering that downturn from an already severely weakened position as individuals and as a nation.
The Week Ahead
Lots of market moving news this week as Oracle, Best Buy, Adobe and Lennar Home Builders report earnings and several major economic reports are due as the week unfolds.
Major economic reports include:
Tuesday: February Existing Home Sales
Wednesday: February Durable Goods, February New Home Sales
Thursday: Initial Unemployment Claims, Continuing Unemployment Claims
Friday: Q4 GDP Revision, March Final Michigan Consumer Sentiment
Sector Spotlight:
Leaders: Thailand, U.S. Health Care, South Africa
Laggards: Natural Gas, Solar, Chile
It’s a beautiful spring weekend in Bend and I’m looking forward to a hike along a crystal mountain stream this afternoon, some spring skiing on Mt. Bachelor tomorrow and our March webinar on Monday. Looking forward to talking with you then.
All the best,
John
John Nyaradi
Publisher
Wall Street Sector Selector
P.S. To attend our March Wall Street Sector Selector Webinar, click here
