March definitely went out like a lion in the markets, as records are being challenged daily...but although MoneyShow's Tom Aspray has recommended the occasional bargain to pick up, he warns that a correction could come very quickly, and that investors should take profits while the sun still shines.
Stocks finished the holiday-shortened week on a firm note, as the S&P 500 reached an all-time closing high on both a daily and weekly basis.
Although the intraday high from October 11, 2007 at 1,576.09 has not yet been exceeded, it was a good week for investors. The market internals were also strong Thursday, which supports another push to the upside this week.
There were still several bouts of selling over the Cyprus situation, but the market was very resilient. The very weak early trading on Wednesday was used as buying opportunity for many, because the Spyder Trust (SPY) closed unchanged.
The tech sector is still lagging, but there was some technical improvement in the outlook for Apple (AAPL). April is a typically a strong month for some technology industry groups. If this sector starts to catch up, it would give the major averages a big boost.
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As I discussed last week, the increased bullishness of some of the big Wall Street strategists has me concerned about what kind of correction we may see in the coming months.
As the weekly chart of the S&P 500 reveals, we have had spring corrections for the past three years. So what about this year?
In 2010, the S&P 500 peaked at the end of April, and then dropped 17.1% over the next nine weeks to hit a low in July. By September, it had started a new rally. The S&P 500 was able to make new highs for the year in November.
The decline in the spring of 2011 was much worse. The S&P peaked the week of May 6, and the correction lasted twenty-three weeks, with the S&P 500 losing 21.6%. The market finally made its low in early October, but the S&P 500 was not able to exceed the 2011 high until March 2012.
Last year’s correction started the week of April 6, and the S&P lost 11% in just eight weeks. Still, the decline was severe enough, coincident with the fear of the Euro debt crisis, to turn the sentiment quite negative. This helped the market bottom out in early June.
If you look at these three corrections, they all had a sharply lower weekly close near the highs (red candle), which was an early warning sign. I do expect we will see a correction by June, but at this point I think it will be briefer and shallower, more like 2012 than 2011.
NEXT: Eurozone and US Economy
|pagebreak|The market was rattled by the Eurozone crisis last week. Despite the temporary fix in Cyprus, more disquieting news is likely in the future.
Italy is having trouble putting together a coalition to govern the country, while Belgium was hoping to finalize a budget that would meet the new EU guidelines. Even Germany, which has the strongest economy, saw an uptick in unemployment that surprised many.
At least in Germany, retail sales came in strong, which helped a bit. Still, the German Dax had a rough week, falling 1.4%.
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The Dax has been leading the S&P 500 since last June, and is now up 30%, versus just a 22% gain for the S&P 500. It is getting close to stronger support, and a decisive break below the 7,530 level would be a negative sign.
Interest rates have also moved lower over the past few weeks, which may be a sign that some investors are getting nervous. I explored the long-term technical outlook for rates in January, in When Will the Fat Lady Sing?
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The weekly chart of the ten-year Treasury Note closed below its 20-week EMA for the first time since the middle of December. The yield hit a high of 2.083% on March 11, but closed Thursday at 1.852%. There is next important support at 1.7% and the uptrend (line c).
There is long-term resistance in the 2.36% to 2.4% area that must be overcome to signal a turn in interest rates. Yields will need to be watched closely over the coming weeks; if they continue to decline, it will likely be a negative sign for the stock market.
There were some very good and some disappointing economic numbers last week. On the plus side, the Dallas Fed Manufacturing Survey was strong, as were durable goods, which were up 5.7%. Also, the S&P Case Shiller Home Price Index was up 8.1% on a year-to-year basis, and GDP was revised slightly higher.
Not all of the housing data was good, however. New home sales declined 4.6%, and pending home sales also fell. The Chicago Purchasing Managers' Index was also weaker than expected, but it had been strong for the last two months. The biggest surprise was the eight-point drop in consumer sentiment last Tuesday.
We should get a better read on manufacturing this week with the Purchasing Managers' Manufacturing Index and the ISM Manufacturing Index both out on Monday. Also out on Monday is construction spending, followed on Tuesday by factory orders.
The ADP Employment Report on Wednesday will set the stage for the monthly jobs report on Friday. The ISM Non-Manufacturing Index is also out on Wednesday, and jobless claims follows on Thursday. Given the full economic calendar, investors should remain watchful this week.
NEXT: What to Watch
|pagebreak|What to Watch
The new high for the S&P 500 has convinced some of the remaining skeptics, but many are still reluctant to buy with the major averages at such lofty levels.
I was looking for some more choppy trading and a deeper decline to set the stage for another push to the upside, but this is now looking less likely. I will be watching Monday’s trading closely, but it now looks like the market will form a top at higher levels.
There are still some stocks that have been correcting for the past few weeks while the major averages have moved higher, and this provides for a decent risk-reward entry. Last Wednesday, I recommended two energy stocks and an ETF. The recommendations were also tweeted well before the opening. As it turned out, stocks opened near the day’s lows and then rebounded.
There was little change last week in individual investor sentiment. The bullish percentage was unchanged, while the number of bearish investors dropped from 33.3% to 28.6%. Financial newsletter writers were a bit more bullish, at 49.5% versus 47.4% the previous week; on the other hand, the bearish percentage also rose slightly.
The VIX or fear index is still at very low levels, and the CBOE Put/Call ratio is just below 1, which is a neutral reading.
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The long-term monthly chart of the NYSE Composite goes back to 2004. It shows that the 2011 high (line a) was overcome in January. Despite the market’s strength, the NYSE is still 6.8% below the May 2008 high, and 14.3% below the all-time high of 10,413.
The monthly chart continues to look quite bullish, with the monthly Starc+ band at 9,541, which is the next real upside target. There is monthly support now at 8,571, and the monthly uptrend (line b) is far below that, at 7,538.
The weekly chart of the NYSE shows that the breakout level (line d) was tested on the late February pullback. Though last week’s close was strong, it was still slightly below the close three weeks ago. The weekly Starc+ band is now at 9,350.
The weekly NYSE Advance/Decline line is rising strongly after breaking out to the upside early in the year. It is well above its strongly rising WMA and the uptrend (line f). There is minor support now at 8,968, with the rising 20-week EMA at 8,758.
The number of stocks making new highs on the NYSE jumped to 373, but is still below the 2013 highs of 430 to 440. The H-L indicator I discussed in Tracking the Market's Trend has flipped back to positive with Thursday's close, but does show a divergence from the highs early in the year.
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S&P 500
The Spyder Trust (SPY) closed at its highest level ever on Thursday at $156.67, which was just below the intraday high of $157.52.
The weekly chart continues to look strong, with the upper trend line (line a) at $157.92 and the weekly Starc+ band at $160.47. The SPY was up 3.3% for the month.
The weekly on-balance volume (OBV) turned back up last week, and is well above its rising EMA. The OBV broke through its resistance (line b) in the middle of December, which was a bullish signal.
The weekly S&P 500 A/D line made new highs last week, breaking out of weekly resistance in the middle of January, while the daily (not shown) gave a positive signal in December.
There is initial weekly support now at $153.59 and then $151.52. The rising 20-week EMA is now at $149.76. Important support waits at $148.73, which was the February low.
Dow Industrials
The SPDR Diamond Trust (DIA) was up just 0.3% for the week, but gained 3.6% for the month. The daily chart shows that DIA has not really broken out of its two-week trading range. Last Friday’s close at $145.32 was just below the March 14 close of $145.33.
The daily Dow Industrials A/D line has turned up from its WMA and is very close to breaking out of its trading range. It is well above the uptrend (line f).
The weekly chart shows minor support now at $143.48, with the rising 20-day EMA at $143.71. The support at $137.60 to $139.81 is now more important.
NEXT: Sector Focus
|pagebreak|Nasdaq-100
The PowerShares QQQ Trust (QQQ) did a bit better last week, up 0.6%, although it gained just 2.8% for the month. It is still well below the September 2012 highs of $70.54. The major 50% Fibonacci resistance from the 2000 high of $120.50 is right at $70. The 61.8% retracement resistance is at $81.94.
The Nasdaq-100 A/D line is acting stronger than prices, as it has broken out above its recent highs while prices are still lagging. The A/D line diverged at the September highs. It is still well below the April 2012 highs.
The weekly and daily relative performance analysis is still negative, as both are below their WMAs (not shown). Therefore, it is still lagging the S&P 500. There is first support for QQQ at $67.62, with a more important level at the February low of $65.96.
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Russell 2000
The iShares Russell 2000 Index (IWM) shows that it closed above the resistance going back to 2011 at the start of the year. This creates an important level of support in the $87 area.
IWM was up 4.36% for the month, and the weekly Starc+ band now stands at $98. The monthly Starc+ band for April is $100.22.
The weekly OBV moved above its WMA in December, and is still in a clear uptrend. It has not yet overcome the 2011 highs, and key support sits at line e. The weekly A/D has moved just slightly above the 2012 highs (line f), although it is well above its rising WMA.
As noted previously, the daily OBV and Russell 2000 A/D line (not shown) both confirmed the March high, and are trading in narrow ranges.
There is minor support at $93.06 to $93.46, which includes the 20-day EMA The 20-week EMA sits at $89.17, with the February low below that at $88.17.
Sector Focus
The iShares Dow Jones Transportation (IYT) put in a strong performance on Friday, suggesting that its recent correction may be over. It had a strong month, gaining 4.3%, and is now up 18% for the year.
The weekly technical studies like the OBV and relative performance (not shown) are positive, and show no signs yet of topping. The weekly Starc+ band sits at $115.66. There is initial support now in the $108 area, with more important levels around $103.
NEXT: 2 Sector Best Bets, Commodities, and Tom's Outlook
|pagebreak|Sector Focus (Continued)
Two sectors stood out last week. The Select Sector SPDR Health Care (XLV) and Select Sector SPDR Utilities (XLU) were both up 2.4% for the week. This was much stronger than the 0.7% gain in the SPY.
The weekly chart of the Select Sector SPDR Utilities (XLU) shows that it closed the week above the August high at $38.54 (line a), which is quite bullish.
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The weekly relative performance has moved above WMA and the recent highs, suggesting that it has bottomed out. The RS line has more important resistance at its downtrend (line b). The weekly OBV looks very strong, having surged through its long-term resistance (line c).
There is monthly support now at $37.70 to $38.20, and because of the technical action, XLU will be added to my Best Sector Bets For the New Year.
The monthly chart of the Select Sector SPDR Health Care (XLV) shows that it closed a few cents below its monthly Starc+ band at $46.26. This is the first time since 2000 that this has occurred. There is monthly pivot resistance for April at $47.91.
The monthly relative performance has been above its WMA since April 2012, and is still acting strong. The monthly OBV moved above its WMA at the end of 2011.
Looking at the weekly and daily OBV, since it is important to examine multiple time frames, they are also positive with no signs of topping. The first good support is in the $44 to $45 area.
The Select Sector SPDR Materials (XLB), the Select Sector SPDR Financials (XLF), Select Sector SPDR Technology (XLK), and the Select Sector SPDR Industrials (XLI) were the weakest last week, all gaining around 0.3%.
Crude Oil
The May crude oil contract closed up $3.43 per barrel last week, and the weekly chart of crude oil (see chart) I featured last week looks very positive. If the energy stocks complete their corrections, it will be one of my favorite sectors.
Precious Metals
In March, I cautioned that the outlook for gold, silver, and gold mining stocks was negative, and that they should be avoided. The outlook for the Spyder Gold Trust (GLD) improved last week, as we have again tested the lower boundaries of its flag formation.
In last week’s column, Gold: Why April Is a Key Month, I recommended that aggressive investors buy GLD and risk about 3%. It still needs a strong weekly close to confirm that a low is in place, and more conservative investors should wait for confirmation.
The Week Ahead
As I mentioned last week, there are only a few stocks that show positive long-term trends and have corrected back to support were they can be bought. Most should concentrate on managing their existing positions—and be sure you have hard stops in place on all of them.
I updated the Charts in Play Portfolio last week, and I continue to take profits and raise stops, even though it is now only 40% invested. I will be updating it again this week. If you are feeling really good about your investments this year, it is a clear sign that you should be taking some more profits.
Because I will be traveling next week, the next regular Week Ahead column will be released on April 12. If there is any dramatic action in the market, I will be providing analysis in my Charts in Play column.
- Don't forget to read Tom's latest Trading Lesson, The Most Powerful Pivot Level
