Week In Review- Tale of Two Tapes

SPX- Annual

Ominous Market Parallel Developing: Prior Bull Markets vs Current Bull

The last two bull major markets topped out (a.k.a. ended) after turning 5. The last leg of the dot com bubble (1994-1999 bull market) topped out in March 2000 (just over 5 yrs) and the 2002-2007 housing/credit bull market topped out in Oct 2007, exactly on its 5th anniversary. Now let’s take a closer look at the current bull market. The current Fed-induced bull turned 5 last month and is now beginning to show early signs of a potential top. Interestingly, the Nasdaq & Russell 2000 both hit their 2014 highs in March 2014 (exactly 5 years after the March 2009 bottom) and the S&P 500 and Dow Jones Industrial Average hit their record highs in the first week of April (just after turning 5).  Over the past few years, weakness has been steadily bought and the selling pressure has been temporary, eventually resolving itself higher. We know that all bull (and bear) markets have a beginning and an end. Our job is to interpret what we see happening and as always, let the market guide us, up and down.

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Market Update: Tale of Two Tapes-  – 4.25.14

In the short term, the bears are getting stronger after a new wave of selling emerged in several important areas of the market, mainly Biotech, Growth & Momentum stocks last week. Earnings season continues in full force but the reaction so far is muted at best. Netflix (NFLX), Chipotle Mexican Grill (CMG), and Facebook (FB) are just a few examples of weakness in several high-beta stocks that rallied after reporting earnings and then quickly gave back their gains and rolled over. It is still early, but if the selling continues then we have to expect more sideways/sloppy action to continue. Remember, important market tops take time to develop and so far, the market could be forming the early stages of a possible topping pattern. The Nasdaq and Russell 2000 are both forming the right shoulder of a possible Head and Shoulders Top. The pattern will be confirmed if the neckline (Recent lows) are breached. Until those technical sell signals are triggered, it is important to note that when you step back, the intermediate and long term outlook remains healthy. We are only a few percentage points below record highs in the major averages and we have not seen a 10% correction in the S&P 500 in two years and are way overdue. The fact that we have not pulled back 10% illustrates how strong the market has been since 2012.

MON-WED: Stocks Edge Higher

Stocks rallied on Monday as investors returned from a long weekend and prepared for one of the busiest weeks of earnings season. After Monday’s close, Netflix gapped up after reporting Q1 results even after the company said it will raise the price of its monthly membership by a small amount. The WSJ reported that merger talks between Barrick Gold (ABX) and Newmont Mining (NEM) fell apart in recent days. Later in the day, Bloomberg News said the deal could be rekindled.

The S&P 500 rallied for the 6th straight day on Tuesday after a slew of earnings were released. Netflix gapped up on Tuesday after reporting strong earnings but spent the rest of the week giving back those gains and turned lower by Friday’s close (not healthy). MCD, TRV, UTX were among some of the larger names which reported. Briefing reported, existing home sales fell 0.2% in March to 4.59 million from an unrevised 4.60 million in February. The Briefing.com consensus expected existing home sales to remain at 4.60 million. Meanwhile, the February Housing Price Index from the FHFA increased 0.6%, which followed a revised uptick of 0.4% during the prior month.

Stocks ended slightly lower on Wednesday after a slew of high-beta stocks rolled over which is not ideal. Economic data was not strong, mainly weak data from the housing market. The weekly MBA Mortgage Index fell 3.3% to follow last week’s increase of 4.3%. New home sales declined 14.5% in March from an upwardly revised 449,000 (from 440,000) in February to 384,000. The Briefing.com consensus expected home sales to increase to 455,000.

THURS & FRI’S ACTION: Sellers Gain The Upper Hand

Stocks were quiet on Thursday as Ukraine fears resurfaced. Apple (AAPL) and Facebook (FB) both opened higher after reporting stronger-than-expected earnings. Apple, increased its share buyback program, raised its dividend and announced a 7-1 stock split. Shares of FB opened higher but quickly turned lower after a slew of other high-beta names were under pressure. Stocks fell hard on Friday as fear escalated in Ukraine and a slew of high-beta stocks dragged the market lower.

MARKET OUTLOOK: Aging Bull

Stepping back the market is building a new base up here as investors digest last year’s strong rally. Remember, the bull market turned 5 in March 2014 and the last bull market topped out after its 5th birthday (Oct 2002-Oct 2007). Clearly, this bull is aging which means the easy money from this cycle is probably behind us and it will get a lot trickier as we move forward. As always, keep your losses small and never argue with the tape.

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