Earnings Season Underway, Markets Uncertain

Alcoa (AA) kicked off earnings season with solid numbers and a generally good outlook, but the headlines were about the top line “miss,” and the stock sold off after hours. We’ll have to watch how this goes in the coming days. Sometimes at the end of a long run, the market starts reacting badly to news that isn’t bad, but isn’t a home run. That is because it’s priced for near perfection.

Quite a number of blue chips are acting rather poorly, most notably our number one bellwether for this bull market, Apple (AAPL), which looks like it is starting to roll over. Yes, there is the matter of re-balancing the QQQ, but selling is selling. A break below the mid 320s would be troubling. It’s too early to hit the panic button; the bull has earned our respect as each pullback has been a buying opportunity, but the probabilities get a little less favorable each time. Be alert and watch the leading stocks.

US Markets: Steady as She Goes

Last week the financial markets reversed course again, amid global scenes of crisis and violence, to bid up a variety of risk assets. Our task is to consider the events in perspective, and try to draw out some direction for the week ahead

Read the full analysis here when it is published (Sunday in all probability).

For readers of this blog, a little something extra. I study charts of the major financial indexes on a continual basis. One can’t help but see patterns in the charts much of the time. Lately a pattern on the S&P 500 has been particularly intriguing.

I had mentioned before my curiosity about Elliott Wave analysis. While I remain unconvinced that there is a good level of predictive validity in this method, and wave counting seems too subjective to be of much use, I do notice these patterns when they appear. Consider the chart of the S&P 500 below. By my admittedly unprofessional count, it could be that the current corrective phase is the beginning of the A-B-C correction at the end of a 5 wave move. If that does turn out to be the case, then we are looking for a deeper correction at this point.

Any reader who is more familiar with the nuances of Elliott Waves is invited to critique or extend the analysis. I’m not sure it would change my market outlook, but I am curious.

(click on chart to enlarge)

 

A Note on the Markets and Apology to Readers

Before we take a look at the market picture, an apology to readers who have come to expect the regular broad analysis of the US financial markets to start each week. This past weekend your humble analyst took Mrs Simple Accountant away for some much needed R&R, and no email, internet, or financial news.

Now, refreshed and ready to get back to work, a few observations and a comment or two on the markets as of Monday’s close:

The stock market had an impressive day, with a big rotation back into cyclical and growth stocks. The SPX came up to the 50 day SMA, and has now retraced nearly 50% of the drop from the February 18th high (closing basis). Volume was lighter than last Wednesday’s big selling day, and a look back reveals that the three of the four highest volume days so far in 2011 have been down days (through my investing career, this has been a generally reliable signal of market weakness…in the current post-crisis bull market, however, this analytical tool appears not to work so well). I should also point out that nearly 20% of NYSE volume on Monday was in Citi shares following the reverse split and penny dividend announcement.

The last two trading days have been somewhat similar: both opened with a gap up from the previous close, and both recorded most of the day’s gain in the first 15 minutes of trading. The difference is that where Friday’s action saw most of the early advance given back through the rest of the session, today the gains held all the way into the close.

It has been a bullish three days, whatever the reason, and the tape is what it is, but as of yet it looks like it could be a counter-trend move in corrective downward swing, or the start of a period of sideways movement that consolidates the gains of the last two years.

Over in the bond market, 10 year Treasuries remain below 3.4% at the moment, so nobody seems to be getting too excited there. For all the talk of an inflation driven debacle in bonds, there is no sign of it yet.

Oil is in the middle of the recent $100 -105 WTI range, and seems to be caught up in suspense over the MENA situation. It’s a wait and see game there.

The movement I find most interesting, as my regular readers may have guessed, is in the US Dollar index. With ECB President Trichet having signaled a hike in short term rates, and potential successor Mario Draghi publicly echoing the sentiment, the euro has moved above $1.40 and seems able to hold that level, while the Dollar index remains below 76. As long as the Dollar remains weak, risk assets are likely to find a bid.

It’s really looking to me like two years of “buy the index and stay put” as a winning strategy may be ready to give way to a trader’s market, and one with a lot of risk at that. I will be watching closely for signals in the coming days and weeks.

Selling Accelerates

No doubt, readers of this blog are paying attention to what is going on in the world, and there isn’t much for me to add. Still, I can’t help but add a few comments.

1. Selling is accelerating on building volume after Tuesday’s successful defense of the 1275 SPX level.

2. 50 day EMA is rolling over for the first time since last summer

3. AAPL shares saw the largest one day drop since the “flash crash”

I am down to ~ 10% equity allocation, having made large shifts to cash in late January and mid February. My focus at this point is to look for support to develop and put that cash to work. However, the pace of events around the globe makes for a treacherous market environment.

Once again, while the attention is on the the terrible tragedy in Japan, and my heart truly goes out to the lovely Japanese people, the events in the Middle East – and Bahrain in particular – are very worrisome. The only place to be now, in my view, is in the safety of cash. This is no time to be a hero in the markets. Please be careful!

S&P 500: Key Level Violated Intraday

The SPX has broken through a near term support level at 1280 this morning. If we close below it, investors have to seriously consider moving to the sidelines in tactical positions. Longer term positions are still OK here, but I would be seriously concerned by a move below 1225 on the SPX and 735 on the Russell 2000.

Treasuries are catching a safe haven bid; the iShares 7 – 10 year fund (ticker: IEF) has risen to the 200 day MA before pulling back slightly. This may be a transient panic move on the Japan news, but be ready to act as decisively as the situation develops.

A Troubling Day in the Markets

This morning I posted the following chart on my instablog over at SA during the first hour of trading. What we had was a sharp drop at the open which saw the SPX violate the lower support line of a descending triangle, as well as breaking the 50 day. The rest of the day didn’t bring much improvement, and we closed near the lows with a surge in volume. The techs and small caps were really hit hard.

Based on the overall market picture, I think there is an increasing probability of a severe break in stocks in the near future. I will outline my thoughts on the data in more detail over the weekend in my regular market review.

Volatility Hasn’t Broken the Stock Market Bulls

We saw an interesting week in the financial markets, as well as in the economic and political news. If we had to characterize it all in one word, the best fit might be: volatility. With open warfare breaking out in Libya, and overshadowing the more portentous events in Bahrain and Yemen, volatility may be with us for some time.

Read the full article here

REITs Breaking Down?

We’re seeing a possible technical breakdown on the iShares REIT ETF (ticker: IYR), as noted on the following chart:

(click to enlarge)

As this is a widely held ETF in a number of diversified and income portfolios, including variants of Mebane Faber’s popular Ivy portfolio, investors should take note and watch positions carefully. Of course, we are nowhere near the 10 month moving average cross that would be a sell signal in the Faber system, which uses Vanguard’s very similar VNQ, but it pays to be vigilant.

March Comes in Like a Lion

Tuesday was a very ugly day in the US stock market: an all day slide with accelerating volume into the close

Sector rotation has gone decidedly defensive…

…and the NDX was weaker than the SPX.

On the positive side, all the major indexes are still above the 50 day, so there’s no reason to panic – yet. However, WTI closing a couple of ticks over $100, and a poor reception of Fed Chairman Bernanke’s Senate Banking Committee testimony, seemed to have rattled the stock market.

We’ve been looking for a correction in the 10% range for weeks now. Time will tell if this is it, but this is the type of action you often see at the start of a correction: we came off the top on heavy volume, regained a portion of that ground on lighter volume, and sold on heavier volume again. Be extra careful!

A Bump in the Road, but Risk Rally Continues

We’ve seen an eventful week, with a sharp jump in oil prices driven by what amounts to civil war in Libya, a rally in Treasury bonds, and a selloff in stocks. After a string of humdrum weeks in which the dominant trend seemed to just roll on without an end in sight, we finally have some counter-directional movement. Now we have to review those trends to see whether they remain in effect.

Please see my full analysis on Monday.