Last Monday's loss of more than 1% in the S&P 500 and the 2014 new daily closing low got the market's attention but the bulls quickly took over as stocks closed the week well above the worst levels.
The financial media continues to parade a host of bullish analysts ignoring that a few had been predicting horrible crashes over the past six months. The individual investor has become a bit more cautious as according to AAII, just 38.9% are now bullish as opposed to 55% the day after Christmas. It would appear that most have moved to the correction camp as the number of bears is still low at 21.5%.
Though this reading makes a correction less likely over the short term, it is still too high. At last August's lows, when the Spyder Trust (SPY) was at $163, only 29% bullish. Friday's weaker than expected Consumer Sentiment reading from the University of Michigan may help to dampen some investor bullishness.
The poor monthly jobs report was quickly discounted by most economists but if we get another weak jobs report in February, it would be harder to ignore. Friday's Housing Starts showed a decline of 9.8% in December but it will probably take several disappointing economic reports to dampen the high level of bullishness.
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One of the more surprising developments of the past month or so has been the strong performance by some of the European country ETFs. Leading the pack is Spain as the iShares MSCI Spain (EWP) is up about 10% since the December 18 taper lows but did give up some ground last week.
This is quite a bit better than the 9.2% gain of the iShares MSCI Italy (EWI) or the 8.9% rise in the iShares MSCI Austria (EWO). All three have done significantly better than the Spyder Trust (SPY), which is up 3.6%. The French and German country ETFs have not yet moved above their late 2013 highs.
As I have been reporting since November, there has been continued improvement in the economic data from the Eurozone. Manufacturing is an important part of these developed economies and the chart of the Eurozone Purchasing Mangers Output Index shows that it has moved sharply into positive territory.
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From a historical perspective, changes in this trend are rarely reversed, suggesting that these economies will improve further in 2014. According to Markit their Eurozone PMI hit a 2-1/2-year high last month, with Spain's PMI showing the sharpest increase. On Thursday, we get new data for both the US and Eurozone.
Last Tuesday's Retail Sales data was also a pleasant surprise as it was stronger than expected in December. This points to a strong 4th quarter GDP reading, and the chart shows a strong uptrend (line b) since the 2008 highs, line a, were overcome.
With Monday's Martin Luther King holiday, we have a shortened trading week and investors will need to wait until Thursday for the next round of economic data.
In addition to the jobless claims on Thursday, we get the PMI Manufacturing Index, Existing Home Sales, and Leading Indicators. In last week's column, I focused on the LEI and provided a long-term chart.
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The bond market is typically focused on the economic data and the technical improvement in the iShares 20+ Year Treasury Bond ETF (TLT) in 2014, is hinting of lower long-term rates. On the chart, I have drawn the quarterly pivot levels, which were featured in Friday's column.
The green and red arrows note the several times over the past year when TLT had a weekly close above or below its quarterly pivot. For example, in the 1st quarter, TLT stayed below the pivot but opened the second quarter above its pivot (point 1).
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The rally in TLT peaked in early May, and at the end of the month, it closed back below its pivot (point 2). This coincided with the completion of the reverse head-and-shoulders bottom formation in the 10-year T-note yields, which also signaled that rates were moving higher.
After the first week of trading in 2014, TLT closed back above its pivot, line 5. The breakout in the OBV above its resistance at line a is also a positive technical sign for TLT. The OBV has been forming higher lows, line b, since the August lows.
The ETFs that track shorter-term yields do not show the same bottom formations and TLT has strong resistance at $108.74. It is possible that the rise in TLT is warning that we may see further weak economic reports in the weeks ahead but if it triggers a deeper market correction, it should be a better buying opportunity.
What to Watch
Those who focus on the fact that the S&P 500 is pretty much at the same level it was at the close of 2013 are missing the big picture as there has been plenty of movement amongst the sectors. The Semiconductor Holders (SMH) is up almost 1% already in 2014 while the Sector Select Energy (XLE) is down 2.7%. Even worse is the S&P Retail Index, which is down over 5%.
The action was choppy last week but there are other industry groups, like the homebuilders, that need only a couple of strong consecutive closes to complete their corrective patterns. We are in the thick of earnings and the market has not been forgiving as it is punishing some stocks that reported better than expected earnings.
Even though the market dropped in late trading, there was some improvement in the technical market outlook last week. This suggests that the major averages could still push to new highs after the current period of consolidation is completed.
The majority of market-tracking and sector ETFs that I follow are positive as they are trading well above their quarterly pivots. A full table was published Friday (1st Quarter ETF Levels to Watch), and it would take a weekly close below their quarterly pivots to weaken their outlook. The pivot resistance levels from the table can be used for upside targets.
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Even though I think the short-term outlook has improved, one has to be a very selective buyer as there are some individual stocks that have too high a risk at current levels. The five-day moving average of the S&P 500 stocks above their 50-day MAs is at 65.36%, which is quite close to the mean at 64.92%.
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