In the past, the month of January has had a good track record in predicting the trend of the stock market for the upcoming calendar year. Through history the “January Effect” was a result of tax-loss selling which causes investors to sell their losing positions at the end of December or subsequently waiting until January to take their profits to defer the capital gains a further year. Let’s review the tendencies.
This past weekend Barron’s had two articles discussing raised bullish price targets: “Will a Stock “Melt-Up” Really Solidify?” and “Lifting the Odds for a Market Melt-Up”. This is just a sample of many of the new articles that the media is openly discussing. There are a growing number of analysts that are raising targets for next year to the 2000 level on the S&P500. In spite of my repeated bearish concerns the market still continues to relentlessly advance.
So can we hit 2000 on the S&P500? The answer has to be yes because in the markets anything can happen, but the more important question is about how realistic or probable it is for it to happen. At the start of the year almost every bullish analyst on the street set targets of 1650-1750 on the upside and to date they have been correct. The problem is that bullish analysts cannot have targets that are below the current levels, which means the bullish analysts must all raise their targets even higher to justify holding their investments. This does not necessarily always lead to a new fairy tale advance.
No better example of that are Apple shares back in 2012. In January 2012 Apple shares started the year around $400.00 a share. Most bullish analysts had set price targets in the $600-$700 range which represented a very bullish 50-75% advance. To everyone’s delight the stock rocketed to $640.00 in just 4 months. Over the subsequent 6 months every analyst rushed to set $800, $900 and $1,000 price targets for the stock. To feed everyone’s euphoria, Apple proceeded to rise to $700.00 a share and everyone was certain that everything was going to be blue skies from there. Yet it was from that moment that Apple began a significant bear market decline that seen it wipe out all gains back to $400.00 a share over the subsequent 9 months.
With that in consideration, recognize that the S&P500 could advance to 2000 like all the super bull analysts are expecting but if Apple has any less to teach, it is that the market can only be at its highest levels when everyone is most bullish. We, on the other hand, will respect the trend but we will unmistakably remain skeptical of its sustainability and cautious of the risk of a market correction when everyone least expects it.
Levels to watch S&P500 December 2013 Futures:
The S&P 500 has now tested the 1770.00-1775.00 area three times and is attempting to retest it again today. This week’s trend will be decided off this level. If the bulls can breakout the market to new highs, there are measured moves toward 1800.00 on the upside which could see bullishness into Friday’s November options expiration. Alternatively, if the bulls fail to make higher highs, a reversal and retest of the 1735.00-1740.00 would be possible. If at any point the market has a legitimate breakdown below 1735.00, it would open the window for the next bigger picture correction or crash. We will remain neutral for a few more trading sessions to see if the market will show its hand for the next market move.
Ceresna Market Breadth Index: Sell Signal Alert
52 Week Mean Price of S&P500: 1587 (183 points below market) (201 point peak 2 weeks ago)
Volatility Index: 12.95% (Already near year highs)
Number of Stocks Making 52 Week Highs: 226 (Year high 894 Jan 2nd)
Number of Stocks Making 52 Week Lows: 30 (Year high 504 Jun 24th)
Number of Stocks Above 50 Day Moving Average: 61.11% (Year high 89.54% Jan 22nd)
Things supporting bulls:
- The bull trend remains intact
- Bonds are correcting as interest rates rise (short term)
- The S&P500 traded over 200 S&P points above its mean indicating that the market is overextended on the upside.
- The leadership stocks (Tesla, Facebook, financials) have stopped advancing in spite of the index being at its highs.
- Market sentiment is very complacent.
- Breadth indicators have rolled to give sell signals.
CRASH ALERT: When we are in crash alert, it do not guarantee a crash but simply us observing that we are in a market state where all the criteria for a crash is there. The checklist was posted in last week’s blog, click to read.
Yesterday’s selling established a low on the S&P500 around 1680.00 before the bounce started. The bulls are still in control, but we will get some valuable information during this advance. It is going to be when the bulls fail to make higher highs during the advances that we will be on the lookout for topping formations. Will the bulls be able to beat Monday’s 1705.00 highs on the futures? If you are concerned, this is a healthy level to be taking some profits off the table and raise some cash.
Canadian and U.S. investors have been enjoying a bullish ride as both stock markets have discounted any underlying concerns and continued the uptrend. Most notably the Toronto market has staged a neck wrenching snap back led largely by Canadian banks. Of notable importance is the rally in oil which has yet to look back. Precious metals have also finally come off of their lows. While the primary trend remains down, golds break above 1300 is offering gold bugs a glimmer of hope. We suspect a retracement higher after such a substantial sell off however there are several resistance levels in place that will hold the bulls back. Bonds continue to drift higher, but are subject to headline risks as are the precious metals. For important insight into key support and resistance levels and possible turning points, watch this weeks Market Forecast:
Stocks, bonds, currencies and commodities continue to chop about with very little commitment on the short term charts. Watch our Weekly Outlook to see where we believe the turning points are and what to watch for as signals to take action as you trade and invest in today's uncertain environment. BE SURE TO CLICK READ MORE TO ACCESS TODAY'S VIDEO.
Last week was challenging as traders and investors waited to see what the Feds in the U.S. and the ECB in Europe had to say about the state of the markets and their open market operations. While the Feds stayed the course, the ECB lowered interest rates slightly in an attempt to stimulate the European economy. While this move sent the U.S. Dollar higher the stock market was relatively unimpressed...until the monthly jobs numbers on Friday. The surprise numbers suggested that the economy improved in April and more jobs were created. This resulted in a substantial swing to the upside for the various U.S. stock exchanges. Even the Canadian stock market has been retracing to the upside as resource and bank stocks have shown some resilience as of late. It should be noted that the TSX/S&P Composite is still off it's highs and hitting a strong resistance. As for the forecast for stocks in the U.S., the question is whether the move was partially a result of a short squeeze in which case that reflects more of a fake out instead of a buy signal. One could use the simultaneous sell of in bonds as a possible indication of a flight to riskier assets however, the question remains how much of the sell off was a result of short term bond traders locking in profits, cutting losses or decreasing position sizes to reduce risk? So it remains to be seen whether the smart money will use this latest rally to "sell in May and go away" or if there is something real here. For a more in depth overview of our expectations for stocks, commodities, currencies and bonds watch our short video an feel free to give us your thoughts below. BE SURE TO CLICK "READ MORE" TO ACCESS THE VIDEO
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