Stock market bulls made a valiant effort to fight off another looming correction last week. The economy is showing strong signs of recovery, the Fed remains confident enough to continue its stimulus tapering, and attractive alternative investments to the U.S. stock market seem scarce. Yes, bulls are all dressed up for more fun times. However, the technical picture paints a different story, at least for the near term. So don’t back up the truck just yet. Caution is in order.
Thursday showed improving manufacturing data, personal income and spending. Friday’s Government Employment Situation report showed that 288,000 joined the payrolls. University of Michigan Consumer Confidence jumped to the highest level since last July. Oil and gas is plentiful. The US dollar is relatively weak, helping the multinationals’ earnings. Pending home sales rebounded in March, the first increase in nine months. Global hot spots (e.g., Ukraine, Iraq, Afghanistan) continue to push global investors into the U.S. The 10-year Treasury yield continued to fall, closing Friday at 2.58%. And as discussed below, Sabrient’s fundamentals-based sector rankings are bullish.
Indeed, the CIO of the California State Teachers’ Retirement System has stated that the nation’s second largest public pension fund can’t figure out where to invest $183 billion outside of U.S. equities. Even though stocks might be getting fatigued, the firm sees few attractive alternatives in which to invest.
So, the setup is clear for an improving economy and growing GDP. But that doesn’t mean the stock market will continue to go straight up from here. Near-term technicals are worrisome, margin debt has reached an all-time high, and trading volume in highly speculative penny stocks has soared to new highs.
The CBOE Market Volatility Index (VIX), a.k.a. “fear gauge,†closed last week at 12.91 and remains firmly below the 15 threshold, indicating low investor trepidation about their stocks. But from a contrarian basis, it is once again oversold and ready to spike up at any time. Buy-to-open call volume on VIX futures is near record levels, meaning that the “smart money†has taken on a risk-reduction mindset that makes the major resistance levels hard to crack.
My view is that the market is poised to endure a significant pullback soon before hitting new highs later in the year.
SPY chart review:
The SPDR S&P 500 Trust (SPY) closed Friday at 188.06, which is up nicely from last week and appears to have negated the head-and-shoulders pattern. However, this doesn’t mean that all is well again in Whoville. Thursday and Friday were uninspiring, and Friday’s candlestick looked quite bearish — a red engulfing pattern with a long upper shadow. Overhead resistance is strong. Oscillators RSI, MACD, and Slow Stochastic all appear to be rolling over, and there is a gap up on April 16 from about 184 that will act as a magnet to be filled and tested. Minor support sits nearby at 187, but the 50-day simple moving average is likely the first level of strong support (near 186), followed by the convergence of gap support at 184 with the 100-day SMA. Below that is the bottom of the long-standing uptrend (currently near 180) and then the 200-day SMA (around 178).
